QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended December
31, 2014

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from:
______ to: ________

Commission file number: 001-33522

________________

SYNTHESIS ENERGY SYSTEMS, INC.

(Exact name of registrant as specified in
its charter)

Delaware

20-2110031

(State of Incorporation)

(I.R.S. Employer Identification No.)

Three Riverway, Suite 300, Houston, Texas

77056

(Address of principal executive offices)

(Zip code)

________________

Registrant’s telephone number, including
area code: (713) 579-0600

Former name, former address and former fiscal
year, if changed since last report: N/A

Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.

Yes
þ
No
¨

Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).

Yes
þ
No
¨

Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
¨

Accelerated filer
¨

Non-accelerated filer
¨

Smaller reporting company
þ

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
¨
No
þ

As of February 10,
2014 there were 73,224,330 shares of the registrant’s common stock, par value $.01 per share, outstanding.

Less comprehensive income (loss) attributable to noncontrolling interests

(545

)

16

(586

)

(3

)

Comprehensive loss attributable to the Company

$

(25,485

)

$

(1,225

)

$

(30,001

)

$

(5,268

)

See accompanying notes to the consolidated
financial statements

4

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Six Months Ended

December 31,

2014

2013

Cash flows from operating activities:

Net loss

$

(30,698

)

$

(5,600

)

Adjustments to reconcile net loss to net cash used in operating activities:

Stock-based compensation expense

1,234

1,518

Depreciation of property, plant and equipment

1,029

1,018

Amortization of intangible and other assets

116

112

Impairment of long-lived assets

20,914

—

Equity in losses of joint ventures

—

1

Foreign currency gains

(27

)

(43

)

Changes in operating assets and liabilities:

Accounts receivable

15

(89

)

Prepaid expenses and other current assets

(599

)

(1,963

)

Inventory

312

(542

)

Other long-term assets

(213

)

331

Accrued expenses and payables

780

920

Net cash used in operating activities

(7,137

)

(4,337

)

Cash flows from investing activities:

Certificate of deposit- restricted

(1,627

)

—

Capital expenditures

(253

)

(695

)

Equity investment in joint ventures

—

(516

)

Net cash used in investing activities

(1,880

)

(1,211

)

Cash flows from financing activities:

Payments on long-term bank loan

—

(1,252

)

Payments on short-term bank loan

(3,251

)

—

Proceeds from short-term bank loan

3,254

3,253

Proceeds from Line of Credit

3,254

—

Proceeds from exercise of stock options, net

55

—

Proceeds from issuance of common stock, net

—

100

Net cash provided by financing activities

3,312

2,101

Net decrease in cash

(5,705

)

(3,447

)

Cash and cash equivalents, beginning of period

19,407

15,870

Effect of exchange rates on cash

26

5

Cash and cash equivalents, end of period

$

13,728

$

12,428

See accompanying notes to the consolidated
financial statements.

5

SYNTHESIS ENERGY SYSTEMS, INC.

Consolidated Statement of Equity

(In thousands)

(Unaudited)

Common
Stock

Accumulated
Other

Non-

Shares

Common

Stock

Additional

Paid-in
Capital

Deficit

Accumulated

Comprehensive

Income

controlling

Interest

Total

Balance at June
30, 2014

73,107

$

731

$

241,125

$

(165,984

)

$

6,062

$

(646

)

$

81,288

Net loss

—

—

—

(30,109

)

—

(589

)

(30,698

)

Currency
translation adjustment

—

—

—

—

108

3

111

Comprehensive
loss

—

—

—

—

—

—

(30,587

)

Net proceeds
from issuance of common stock

117

1

54

—

—

—

55

Stock-based
compensation expense

—

—

1,234

—

—

—

1,234

Balance
at December 31, 2014

73,224

$

732

$

242,413

$

(196,093

)

$

6,170

$

(1,232

)

$

51,990

See accompanying notes to the consolidated
financial statements.

6

SYNTHESIS ENERGY SYSTEMS, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 — Summary of Significant
Accounting Policies

(a) Organization and description of business

Synthesis Energy Systems,
Inc. (“SES”), together with its wholly-owned and majority-owned controlled subsidiaries (collectively, the “Company”)
is an energy and gasification technology company that provides products and solutions to the energy and chemical industries. The
Company’s business is to create value by supplying its technology, equipment and services into global projects where lower
cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted
through its proprietary gasification technology into clean synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide,
and methane), which is then used to produce a variety of high value energy and chemical products. The Company’s initial
operating projects to date convert high ash coal and coal wastes to chemical grade methanol, and the Company is pursuing a variety
of additional global projects under development by customers who may use its technology platform to convert low quality coals
such as lignite, coal wastes, municipal wastes and agricultural waste biomass to high value products such as electric power, transportation
fuels, substitute natural gas fuel for direct reduction iron steel making and other products. The Company’s technology is
originally based on the U-GAS
®
process developed by the Gas Technology Institute and the Company has augmented
and differentiated the technology through design, detailed engineering, constructing, starting up and operating two commercial
plants in China. The Company’s headquarters are located in Houston, Texas.

(b) Basis of presentation and principles of
consolidation

The consolidated financial
statements for the periods presented are unaudited. Operating results for the three month and six months periods ended December
31, 2014 are not necessarily indicative of results to be expected for the fiscal year ending June 30, 2015.

The consolidated financial
statements are in U.S. dollars. Non-controlling interests in consolidated subsidiaries in the consolidated balance sheets represents
minority stockholders’ proportionate share of the equity in such subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto reported in the Company’s Annual Report on Form 10-K for
the year ended June 30, 2014. Significant accounting policies that are new or updated from those presented in the Company’s
Annual Report on Form 10-K for the year ended June 30, 2014 are included below. The consolidated financial statements have been
prepared in accordance with the rules of the United States Securities and Exchange Commission (“SEC”) for interim financial
statements and do not include all annual disclosures required by generally accepted accounting principles in the United States.

(c) Certificate of deposit- restricted

The Company had approximately
$1.6 million in restricted certificates of deposit at December 31, 2014. These amounts represent deposits made to Zaoahuang Bank
Co, Ltd. and are used to secure the ZZ Line of Credit Agreement (as defined in Note 2)with Zaozhuang Bank Co., Ltd. These amounts
are not available to the Company, unless the line of credit is paid down proportionately.

The joint ventures
which the Company enters into may be considered VIEs. The Company consolidates all VIEs where it is the primary beneficiary. This
determination is made at the inception of the Company’s involvement with the VIE and is continuously assessed. The Company
considers qualitative factors and forms a conclusion that the Company, or another interest holder, has a controlling financial
interest in the VIE and, if so, whether it is the primary beneficiary. In order to determine the primary beneficiary, the Company
considers who has the power to direct activities of the VIE that most significantly impacts the VIE’s performance and has
an obligation to absorb losses from or the right to receive benefits of the VIE that could be significant to the VIE. The Company
does not consolidate VIEs where it is not the primary beneficiary. The Company accounts for these unconsolidated VIEs using either the
equity method of accounting or the cost method of accounting and includes its net investment on its consolidated balance sheets. Under
the equity method, the Company’s equity interest in the net income or loss from its unconsolidated VIEs is recorded in non-operating
(income) expense on a net basis on its consolidated statement of operations. Equity investments in which the Company exercises
significant influence but does not control and is not the primary beneficiary are accounted for using the equity method. In the
event of a change in ownership, any gain or loss resulting from an investee share issuance is recorded in earnings. Investments
in which the Company is not able to exercise significant influence over the investee are accounted for under the cost method. Controlling
interest is determined by majority ownership interest and the ability to unilaterally direct or cause the direction of management
and policies of an entity after considering any third-party participatory rights.

The Company has determined
that the ZZ Joint Venture is a VIE and has determined that the Company is the primary beneficiary. In making the initial determination,
the Company considered, among other items, the change in profit distribution between the Company and Xuejiao after 20 years.
The expected negative variability in the fair value of the ZZ Joint Venture’s net assets was considered to be greater during
the first 20 years of the ZZ Joint Venture’s life, which coincided with our original 95% profit/loss allocation, versus
the latter 30 years in which the Company’s profit/loss allocation would be reduced to 10%. As the result of an amendment
to the ZZ Joint Venture agreement in 2010, the profit distribution percentages will remain in place after the first 20 years,
providing further support to the determination that the Company is the primary beneficiary.

The following tables
provide additional information on the ZZ Joint Venture’s assets and liabilities as of December 31, 2014 and June 30, 2014
which are consolidated within the Company’s consolidated balance sheets (in thousands
):

ZZ Joint Venture’s percentage of the amount on the Company’s
consolidated balance sheets.

(3)

Includes the effect of impairment of long-lived assets related to
our ZZ Joint Venture facility.

The Company has determined
that the Yima Joint Ventures are VIEs and that Yima, the joint venture partner, is the primary beneficiary since Yima has a 75%
ownership interest in the Yima Joint Ventures and has the power to direct the activities of the VIE that most significantly influence
the VIE’s performance.

8

Until May 31, 2013,
the Company accounted for its equity interest in the Yima Joint Ventures under the equity method of accounting. Under this method,
the Company recorded its proportionate share of the Yima Joint Ventures’ net income or loss based on the Yima Joint Venture’s
financial results. As of June 1, 2013, the Company changed to the cost method of accounting because the Company concluded
that it is unable to exercise significant influence over the Yima Joint Ventures. The Company’s conclusion regarding of
its lack of significant influence is due to various circumstances including limited participation in operating and financial policymaking
processes and the Company’s limited ability to influence technological decisions.

The Company has determined
that SES Resource Solutions, Ltd. (“SRS”) which was formed in June 2011 is a VIE and that the Company is not the
primary beneficiary since neither the Company nor Midas Resources AG control SRS since each have a 50% ownership interest in SRS
and the control, risks and benefits of SRS are shared equally. SRS had no assets or liabilities as of December 31, 2014 and
was dissolved on January 9, 2015.

The Company has determined
that the TSEC Joint Venture (as defined in Note 2 – Joint Ventures – TSEC Joint Venture) is a VIE and that TST, the
joint venture partner, is the primary beneficiary since TST has a 65% ownership interest in the TSEC Joint Venture and has the
power to direct the activities of the TSEC Joint Venture that most significantly influence its performance.

The Company has determined
that the GC Joint Venture is a VIE and has determined that it is the primary beneficiary since the Company has a 51% ownership
interest in the GC Joint Venture and since there are no qualitative factors that would preclude the Company from being deemed the
primary beneficiary. There were no significant assets recorded within the GC Joint Venture as of December 31, 2014. There were
however, current liabilities of approximately $0.6 million as of December 31, 2014 and $1.2 million as of December 31, 2013, related
to unpaid settlements of amounts due to various contractors from the initial construction work for the project. In June 2014, the
Company wrote off approximately $0.6 million of these unpaid settlements according to current local business contract law. The
GC Joint Venture project is not currently being developed and the Company is continuing to work to liquidate and ultimately dissolve
the GC Joint Venture.

(e) Revenue Recognition

Revenue from sales
of products, which has included the capacity fee and energy fee earned at the ZZ Joint Venture plant and is expected to include
sale of methanol under the ZZ Cooperation Agreement, and sales of equipment are recognized when the following elements are satisfied:
(i) there are no uncertainties regarding customer acceptance; (ii) there is persuasive evidence that an agreement exists;
(iii) delivery has occurred; (iv) the sales price is fixed or determinable; and (v) collectability is reasonably
assured. The Company records revenue net of any applicable value-added taxes.

Technology licensing
revenue is typically received over the course of a project’s development as milestones are met. The Company may receive
upfront licensing fee payments when a license agreement is entered into. Typically, the majority of a license fee is due once
project financing and equipment installation occur. The Company recognizes license fees as revenue when the license fees become
due and payable under the license agreement, subject to the deferral of the amount of the performance guarantee. Fees earned
for engineering services, such as services that relate to integrating our technology to a customer’s project, are recognized
using the percentage-of-completion method.

(f) Fair value measurements

Accounting standards
require that fair value measurements be classified and disclosed in one of the following categories:

Level 1

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2

Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

9

The Company’s financial
assets and liabilities are classified based on the lowest level of input that is significant for the fair value measurement. The
following table summarizes the assets and liabilities of the Company measured at fair value on a recurring basis as of December
31, 2014 and June 30, 2014 (in thousands):

December
31, 2014

Level
1

Level
2

Level
3

Total

Assets:

Certificates
of Deposit

$

—

$

50

(1)

$

—

$

50

Certificates
of Deposit-restricted

—

1,634

(1)

—

,1,634

Money
Market Funds

—

11,474

(2)

—

11,474

Liabilities:

Line of credit

—

3,269

(3)

—

3,269

Short-term
bank loan

—

3,269

(3)

—

3,269

June 30, 2014

Level 1

Level 2

Level 3

Total

Assets:

Certificates of Deposit

$

—

$

50

(1)

$

—

$

50

Money Market Funds

—

16,971

(2)

—

16,971

Liabilities:

Short-term bank loan

—

3,251

(3)

—

3,251

(1) Amount included in current assets
on the Company’s consolidated balance sheets.

(2) Amount included in cash and cash
equivalents on the Company’s consolidated balance sheets.

(3) Amount included in current liabilities
on the Company’s consolidated balance sheets.

The carrying values of
the certificates of deposit, money market funds, short-term debt approximate fair value, which was estimated using quoted market
prices for those or similar investments. The carrying value of the Company’s other financial instruments, including accounts
receivable and accounts payable, approximate their fair values.

The following table summarizes
the assets of the Company measured at fair value on a non-recurring basis as of December 31, 2014 and June 30, 2014 (in thousands):

The Company’s Level
3 asset fair values are determined using a pricing model and discounted cash flow methodology, as well as significant management
judgment and estimation for our ZZ Joint Venture.

The losses recorded during
the three months and six months ended December 31, 2014, which were a result of the ZZ Joint Venture plant impairment, were as
follows (in thousands):

10

Three Months Ended
December 31,
2014

Six Months Ended
December 31,
2014

Impairment of long-lived assets designated as held and used

$

20,914

$

20,914

Total losses recorded

$

20,914

$

20,914

(g) Recently Issued Accounting Standards

The Financial Accounting Standards Board issued
Accounting Standards Update (ASU) 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going concern
. ASU 2014-15 is intended to define management’s
responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern
and provide related footnote disclosures. This ASU is effective for interim periods within annual periods beginning after December
15, 2016. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

Note 2 – Joint Ventures

Zao Zhuang Joint Venture

Joint Venture Agreement

On July 6, 2006, the
Company entered into a cooperative joint venture contract with Shandong Hai Hua Coal & Chemical Company Ltd., or Hai Hua,
which established Synthesis Energy Systems (Zao Zhuang) New Gas Company Ltd., or the ZZ Joint Venture, a joint venture company
that has the primary purposes of (i) developing, constructing and operating a syngas production plant utilizing the U-GAS
®
technology in Zao Zhuang City, Shandong Province, China and (ii) producing and selling syngas and the various byproducts of
the plant. In August 2012, Hai Hua’s name was changed to Shandong Weijiao Group Xuecheng Energy Company Ltd., or Xuecheng
Energy, after a change in control transaction. We own 97.6% of the ZZ Joint Venture and Xuecheng Energy owns the remaining 2.4%.
We consolidate the results of the ZZ Joint Venture in our consolidated financial statements.

On July 24, 2013, the ZZ
Joint Venture entered into a cooperation agreement (the “ZZ Cooperation Agreement”) with Xuecheng Energy and its parent
company, Shandong Xuejiao Chemical Co., Ltd. (collectively referred to as “Xuejiao”), which serves to supersede the
existing syngas purchase and sale agreement among the parties dated October 22, 2006 and supplemented previously in 2008. The ZZ
Cooperation Agreement, which became effective on October 31, 2013, represents the basis for an integrated syngas to methanol operation
and resolution of the nonpayment of the contractual capacity fees by Xuejiao. Under the terms of the ZZ Cooperation Agreement,
Xuejiao will (i) provide the ZZ Joint Venture with use of their methanol plant for ten years at no cost to the ZZ Joint Venture,
(ii) provide a bank loan guarantee of approximately $3.3 million for a majority of the financing necessary for the ZZ Joint Venture
for the retrofit and related costs of the ZZ Joint Venture plant, (iii) waive certain advances previously made to the ZZ Joint
Venture and (iv) supply discounted coke oven gas produced by its existing coke ovens to be used in combination with synthesis gas
to produce refined methanol from the new ZZ Joint Venture integrated syngas methanol operation. The new integrated operation will
be managed by the ZZ Joint Venture.

Effective October 31, 2013,
the ZZ Joint Venture terminated and waived its claims to past due capacity fees owed by Xuejiao under the prior syngas purchase
and sale agreement. Pursuant to the ZZ Cooperation Agreement, prior payments of approximately $1.8 million were applied to
settling the prior payments due under the syngas purchase and sale agreement. As a result, the ZZ Joint Venture recognized these
related party advances as product sales of approximately $1.5 million, net of value-added taxes, during the year ended June 30,
2014.

The ZZ Joint Venture
began producing and selling methanol in November 2013 and sold 12,268 tonnes of methanol during the three months ended December
31, 2014 generating approximately $3.7 million of revenue. The Company assumed operational control of the integrated methanol production
facility in October 2013 under a restructured commercial arrangement. The ZZ Joint Venture completed the plant retrofits and equipment
upgrades to enable increased methanol production from integrated syngas and coke oven gas feedstock. The ZZ Joint Venture is now
operating an integrated plant which has two operating modes where it (i) converts coke oven gas directly to methanol and (ii) converts
coal to syngas, then blends the syngas and coke oven gas at a specific ratio to produce additional quantities of methanol.
The ZZ Joint Venture began producing and selling methanol in November 2013 from coke oven gas. The ZZ Joint Venture is managing
syngas production in order to optimize results. The syngas facility will generally operate when adequate coke oven gas supplies
are available to achieve the correct syngas to coke oven gas blend ratio.

11

Additionally, the Company
is also evaluating alternative products and partnership structures in an effort to repurpose the ZZ Joint Venture plant. In 2010,
the ZZ Joint Venture received the necessary government approval for an expansion into monoethylene glycol production. This expansion
project remains under evaluation by us. The Company is also evaluating certain new downstream technologies to produce high value
products and options for maximizing site asset value. The Company is also considering other options for the gasifiers at the plant,
including repurposing by moving to a new location, since methanol prices are in decline.

Although the Company intends
for the ZZ Joint Venture to sustain itself through its own earnings, the Company may need to make additional contributions to the
ZZ Joint Venture in order for it to meet its obligations. For example, in September 2014, we made a capital contribution of $1.5
million to the ZZ Joint Venture. This capital contribution was used to pay a portion of the ZZ Short-term Loan, which was due on
September 9, 2014.

During the three months
ended December 31, 2014, there was a significant decline in methanol prices in the China commodity market, which put significant
pressure on our methanol production margins at the ZZ Joint Venture plant. Accordingly, the Company evaluated the ongoing value
of the ZZ Joint Venture facility and based on this evaluation, the Company determined that the $32 million carrying value of the
ZZ Joint Venture facility was no longer entirely recoverable. Due to this impairment, the Company wrote down the value of the facility
to its estimated fair value of $11 millon and incurred an impairment expenses of $20.9 million. Fair value was based on expected
future cash flows using Level 3 inputs under ASC 820. While changes in market conditions for methanol in China may increase the
Company’s operating margins, any further degradation in methanol prices, as well as changes in assumptions used to test for
recoverability and to determine fair value, could result in additional impairment charges in the future for the ZZ Joint Venture
facility.

Short-term Loan Agreement with Zaozhuang Bank Co., Ltd

On September 10, 2013,
the ZZ Joint Venture entered into a short-term loan agreement with Zaozhuang Bank Co., Ltd. (the “ZZ Short-term Loan”)
and received approximately $3.3 million of loan proceeds for the retrofit and related costs contemplated by the ZZ Cooperation
Agreement, the principal was repaid on the due date, September 9, 2014.

Working Capital Loan Agreement with Zaozhuang Bank Co., Ltd

On October 2, 2014, the
ZZ Joint Venture replaced the above ZZ Short-term Loan with a new working capital loan agreement with Zaozhuang Bank Co., Ltd.
(the “ZZ Working Capital Loan”), and received approximately $3.3 million of loan proceeds.

Key terms of the ZZ
Working Capital Loan are as follows:

•

Term of the loan is one year, due on September 23, 2015;

•

Interest is payable monthly at an annual rate of 9%;

•

Xuecheng Energy is the guarantor of the loan;

•

Certain assets of the ZZ Joint Venture, including land use rights and the administration building,
are pledged as collateral for the loan; and

•

Subject to customary events of default which, should one or more of them occur and be continuing,
would permit Zaozhuang Bank Co., Ltd. to declare all amounts owing under the agreement to be due and payable immediately.

Line of Credit (Deposit Secured Loan) with Zaozhuang Bank Co.,
Ltd

On October 8, 2014, the
ZZ Joint Venture entered a Line of Credit Agreement with Zaozhuang Bank Co., Ltd. (the “ZZ Line of Credit Agreement”),
and received a line of credit of approximately $2.5 million. On October 9, 2014, the ZZ Joint Venture entered an additional Line
of Credit Agreement with Zaozhuang Bank Co., Ltd. and received a line of credit of approximately $0.8 million.

12

Key terms of the two lines
of credit are as follows:

•

The ZZ Joint Venture is required to deposit 50% of the total face amount, or approximately $1.6
million, to Zaozhuang Bank for the line of credit as a security deposit, and the Company has recorded this amount as certificates
of deposit – restricted on its balance sheet as of December 31, 2014;

•

Term of the lines of credit is six months, due on April 8 and April 9, 2015 respectively, and can
be renewed for another six month term with bank approval;

•

Service fee is 0.05% of the face amount for each renewal.

•

Xuecheng Energy is the guarantor of each line of credit;

•

Certain assets of the ZZ Joint Venture, including land use rights and the administration building,
are pledged as collateral for the lines of credit; and

•

Subject to customary events of default which, should one or more of them occur and be continuing,
would permit Zaozhuang Bank Co., Ltd. to declare all amounts owing under the agreements to be due and payable immediately.

Xuecheng Energy’s
combined guarantee for both the ZZ Working Capital Loan and the ZZ Line of Credit Agreement is limited to approximately $3.3 million.

Yima Joint Ventures

In August 2009, the
Company entered into amended joint venture contracts with Yima, replacing the prior joint venture contracts entered into in October 2008
and April 2009. The joint ventures were formed for each of the gasification, methanol/methanol protein production, and utility
island components of the plant, or collectively, the Yima Joint Ventures. The amended joint venture contracts provide that: (i) the
Company and Yima contribute equity of 25% and 75%, respectively, to the Yima Joint Ventures; (ii) Yima will guarantee the
repayment of loans from third party lenders for 50% of the project’s cost and, if debt financing is not available, Yima is
obligated to provide debt financing via shareholder loans to the project until the project is able to secure third-party debt financing;
and (iii) Yima will supply coal to the project from a mine located in close proximity to the project at a preferential price
subject to a definitive agreement to be subsequently negotiated. In connection with entering into the amended contracts, the Company
and Yima contributed remaining cash equity contributions of $29.3 million and $90.8 million, respectively, to the Yima
Joint Ventures during the three months ended September 30, 2009. The Company and Yima shall share the profits, and bear the
risks and losses, of the joint ventures in proportion to their respective ownership interests.

In exchange for such capital
contributions, the Company owns a 25% interest in each joint venture and Yima owns a 75% interest. Notwithstanding this, in connection
with an expansion of the project, the Company has the option to contribute a greater percentage of capital for the expansion, such
that as a result, the Company would have up to a 49% ownership interest in the Yima Joint Ventures.

The remaining capital for
the project has been funded with project debt obtained by the Yima Joint Ventures. Yima agreed to guarantee the project debt in
order to secure debt financing from domestic Chinese banking sources. The Company has agreed to pledge to Yima its ownership interests
in the joint ventures as security for the Company’s obligations under any project guarantee. In the event that the necessary
additional debt financing is not obtained, Yima has agreed to provide a loan to the joint ventures to satisfy the remaining capital
needs of the project with terms comparable to current market rates at the time of the loan.

Under the terms of the
joint venture agreements, the Yima Joint Ventures are to be governed by a board of directors consisting of eight directors, two
of whom were appointed by the Company and six of whom were appointed by Yima. The joint ventures also have officers that are nominated
by the Company, Yima and/or the board of directors pursuant to the terms of the joint venture contracts. The term of the joint
venture shall commence upon each joint venture company obtaining its operating license and shall end 30 years after commercial
operation of the plant.

13

The Yima Joint Venture
plant generated its first methanol production in December 2012. The Yima Joint Venture plant’s refined methanol section was
commissioned in December 2013, and has operated at limited capacity since that date. The plant is designed to produce 300,000 tonnes
per year of methanol from operating two of its three available gasifiers and has achieved 100% peak syngas production levels and
80% peak methanol production levels. This plant is intended to provide a commercial demonstration of the Company’s technology
as deployed on a much larger scale than the ZZ Joint Venture plant.

The Yima Joint Venture
initiated an outage in March 2014 intended to allow the plant to make broad and miscellaneous improvements to many areas of the
entire methanol producing facility which had not been completed or properly installed. Many of these improvements were punch-list
items left over from construction, along with improvements which have been learned from the past year’s operation at the
plant. Additionally, it was identified during this time that the Yima Joint Venture has not installed all the required units related
to removal of sulfur compounds from syngas. A portion of these repairs were completed and the facility was restarted in late June
2014. The plant continues to run at approximately 30% to 50% of design capacity as data is gathered and as repairs and construction
continue to be made to the facility.

The Company has included
approximately $3.0 million of royalty costs due to GTI for the Yima Joint Ventures’ U-GAS
®
license as
part of its investment in joint ventures on its consolidated balance sheet, including a $1.5 million payment paid to GTI in June 2009
(when the amended joint venture contracts were signed), a $0.5 million payment in October 2013, and $1.0 million of payments in
January 2014.

Until May 31, 2013, the
Company accounted for its equity interest in the Yima Joint Ventures under the equity method of accounting. Under this method,
the Company recorded its proportionate share of the Yima Joint Ventures’ net income or loss based on the Yima Joint Venture’s
financial results. As of June 1, 2013, the Company changed to the cost method of accounting because the Company concluded that
it is unable to exercise significant influence over the Yima Joint Ventures. The Company’s conclusion regarding its
lack of significant influence is based on its interactions with the Yima Joint Ventures related to the start-up and operations
and due to various other circumstances including limited participation in operating and financial policymaking processes and the
Company’s limited ability to influence technological decisions. There was no equity in losses of the Yima Joint Ventures
recognized for financial reporting purposes for the three months and six months period ended December 31, 2014 and 2013 since the
Company changed from the equity method to the cost method of accounting as of June 1, 2013.

Additionally, in January
2011, the Company signed gasifier sales agreements with the Yima Joint Ventures to sell gasifiers and gasifier related equipment
for an aggregate contract price of $3.0 million. A portion of the equipment associated with these orders was ordered from TST (as
defined under “TSEC Joint Venture” in this Note 2). The gasifiers were completed and delivered in January 2012 to the
Yima Joint Ventures. As of December 31, 2014, the Yima Joint Ventures had paid $2.4 million of the total contract price and still
owed the remaining payment approximately of $0.67 million to the Company. The Company still owes a combined $0.67 million to both
TST and an additional vendor associated with the equipment purchase, which is accrued as a current liability on the Company’s
consolidated balance sheet.

During the three
months ended December 31, 2014, there was a significant decline in methanol price in China commodity market, which put
pressure on our Yima Joint Venture plant methanol production margins. Accordingly, the Company performed a fair value
analysis based on expected future cash flows using Level 3 inputs under ASC 820. The results of the test indicated that the
estimated current fair value of the Yima investment exceeded its book value, and as a result, no impairment is required.

14

TSEC Joint Venture

Joint Venture Contract

On
February 14, 2014, SES Asia Technologies Limited, one of the Company’s wholly owned subsidiaries, entered into a Joint Venture
Contract (the “JV Contract”) with Zhangjiagang Chemical Machinery Co., Ltd., which subsequently changed its legal name
to Suzhou Tianwo Science and Technology Co. Ltd. (“TST”), to form Jangsu Tianwo-SES Clean Energy Technologies Limited
(the “TSEC Joint Venture”). The purpose of the TSEC Joint Venture is to establish the Company’s gasification
technology as the leading gasification technology in the TSEC Joint Venture territory (which is initially China, Indonesia, the
Philippines, Vietnam, Mongolia and Malaysia) by becoming a leading provider of proprietary equipment for the technology. The scope
of the TSEC Joint Venture is to market and license the Company’s gasification technology via project sublicenses; procurement
and sale of proprietary equipment and services; coal testing; and engineering, procurement and research and development related
to the technology. TST contributed RMB 53,800,000 in April 2014 and is required to contribute an additional RMB 46,200,000 within
two years of contract execution for a total contribution of RMB 100,000,000 (approximately USD $16 million) in cash to the TSEC
Joint Venture, and owns 65% of the TSEC Joint Venture. The Company has contributed an exclusive license to use of its technology
in the TSEC Joint Venture territory pursuant to the terms of a Technology Usage and Contribution Agreement entered into among the
TSEC Joint Venture, TST and the Company (the “TUCA”) on the same date. The Company owns 35% of the TSEC Joint Venture.

Under the JV Contract,
neither party may transfer their interests in the TSEC Joint Venture without first offering such interests to the other party.
Notwithstanding this, the Company has the right until 30 days after the first project sublicense is entered into by the TSEC Joint
Venture to transfer 5% of its interest to a financial investor. If the Company elects not to transfer such 5% interest during that
period, TST has the option to purchase such interest from the Company for RMB 10,000,000 (approximately USD$1.6 million).

The JV Contract also includes
a non-competition provision which requires that the JV be the exclusive legal entity within the TSEC Joint Venture territory for
the marketing and sale of any gasification technology or related equipment that utilizes low quality coal feedstock. Notwithstanding
this, TST has the right to manufacture and sell gasification equipment outside the scope of the TSEC Joint Venture within the TSEC
Joint Venture territory. In addition, the Company has the right to develop and invest equity in projects outside of the TSEC Joint
Venture within the TSEC Joint Venture territory. After the termination of the TSEC Joint Venture, TST must obtain written consent
from the Company for the market development of any gasification technology that utilizes feedstock in the TSEC Joint Venture territory.

The JV Contract may be
terminated upon, among other things, (i) a material breach of the JV Contract which is not cured, (ii) a violation of the TUCA,
(iii) the failure to obtain positive net income within 24 months of establishing the TSEC Joint Venture or (iv) mutual agreement
of the parties.

On March 18, 2014, the
TSEC Joint Venture received the required 20-year business license from the State Administration for Industry & Commerce of
the People’s Republic of China (SAIC) in Zhangjiagang. On April 8, 2014, the transactions were completed and the TSEC Joint
Venture began operations.

Technology Usage and Contribution Agreement

Pursuant to the TUCA,
the Company has contributed to the TSEC Joint Venture the exclusive right to the Company’s gasification technology in the
TSEC Joint Venture territory, including the right to: (i) grant site specific project sub-licenses to third parties; (ii) use the
Company’s marks for proprietary equipment and services; (iii) engineer and/or design processes that utilize the Company’s
technology or other Company intellectual property; (iv) provide engineering and design services for joint venture projects and
(v) take over the development of projects in the TSEC Joint Venture territory that have previously been developed by the Company
and its affiliates.

The TSEC Joint Venture
will be the exclusive operational entity for business relating to the Company’s technology in the TSEC Joint Venture Territory.
If the TSEC Joint Venture loses exclusivity due to a Company breach, TST is to be compensated for direct losses and all lost project
profits. The Company will also provide training for technical personnel of the TSEC Joint Venture through the second anniversary
of the establishment of the TSEC Joint Venture. The Company will also provide a review of engineering works for the TSEC Joint
Venture. If modifications are suggested by the Company and not made, the TSEC Joint Venture bears the liability resulting from
such failure. If the Company suggests modifications and there is still liability resulting from the engineering work, it is the
liability of the Company.

Any party making, whether
patentable or not, improvements relating to the Company technology after the establishment of the TSEC Joint Venture, grants to
the other Party an irrevocable, non-exclusive, royalty free right to use or license such improvements and agrees to make such improvements
available to the Company free of charge. All such improvements shall become part of the Company’s technology and both parties
shall have the same rights, licenses and obligations with respect to the improvement as contemplated by the TUCA.

15

The TSEC Joint Venture
will establish an Intellectual Property Committee, with two representatives from the TSEC Joint Venture and two from the Company.
This Committee shall review all improvements and protection measures and recommend actions to be taken by the TSEC Joint Venture
in furtherance thereof. Notwithstanding this, each party is entitled to take actions on its own to protect intellectual property
rights.

Any breach of or default
under the TUCA which is not cured on notice entitles the non-breaching party to terminate. The parties can suspend performance
of the TUCA in the event of a dispute if the dispute poses a significant adverse impact on performance. The TSEC Joint Venture
indemnifies the Company for misuse of the Company’s technology or infringement of the Company’s technology upon rights
of any third party.

SES Resource Solutions,
Ltd., or SRS, is a joint venture owned 50% by us and 50% by Midas Resources AG, or Midas that was formed in June 2011 to provide
additional avenues of commercialization for the Company’s technology. Key objectives of the joint venture are to identify
and procure low cost, low rank coal resources for which the Company’s technology represents the best route to commercialization;
to provide investment opportunities in both gasification facilities and coal resources; and to facilitate the establishment of
gasification projects globally based on the Company’s technology. In December 2012, SRS suspended its activities due to the
unavailability of financing for coal resources, as of January 9, 2015, SRS was dissolved.

The Company’s investment
in SRS is accounted for using the equity method. At December 31, 2014, SRS had no assets or liabilities as amounts are funded by
the Company as costs are incurred.

Note 3 – GTI License Agreement

On
November 5, 2009, the Company entered into an Amended and Restated License Agreement (the “GTI Agreement”) with
GTI, replacing the Amended and Restated License Agreement between the Company and GTI dated August 31, 2006, as amended. Under
the GTI Agreement, the Company maintains its exclusive worldwide right to license the U-GAS
®
technology for
all types of coals and coal/biomass mixtures with coal content exceeding 60%, as well as the non-exclusive right to license the
original U-GAS
®
technology for 100% biomass and coal/biomass blends exceeding 40% biomass.

In order to sublicense
any U-GAS ® system, the Company is required to comply with certain requirements set forth in the GTI Agreement. In the
preliminary stage of developing a potential sublicense, the Company is required to provide notice and certain information regarding
the potential sublicense to GTI and GTI is required to provide notice of approval or non-approval within ten business days of the
date of the notice from the Company, provided that GTI is required to not unreasonably withhold their approval. If GTI does not
respond within that ten business day period, they are deemed to have approved of the sublicense. The Company is required to provide
updates on any potential sublicenses once every three months during the term of the GTI Agreement. The Company is also restricted
from offering a competing gasification technology during the term of the GTI Agreement.

16

For each U-GAS
®
unit which the Company licenses, designs, builds or operates for itself or for a party other than a sublicensee and which uses
coal or a coal and biomass mixture or biomass as the feed stock, the Company must pay a royalty based upon a calculation using
the MMBtu per hour of dry syngas production of a rated design capacity, payable in installments at the beginning and at the completion
of the construction of a project (the “Standard Royalty”). If the Company invests, or has the option to invest, in
a specified percentage of the equity of a third party, and the royalty payable by such third party for their sublicense exceeds
the Standard Royalty, the Company is required to pay to GTI, an agreed percentage split of third party licensing fees (the “Agreed
Percentage”) of such royalty payable by such third party. However, if the royalty payable by such third party for their sublicense
is less than the Standard Royalty, the Company is required to pay to GTI, in addition to the Agreed Percentage of such royalty
payable by such third party, the Agreed Percentage of its dividends and liquidation proceeds from its equity investment in the
third party. In addition, if the Company receives a carried interest in a third party, and the carried interest is less than a
specified percentage of the equity of such third party, the Company is required to pay to GTI, in its sole discretion, either (i) the
Standard Royalty or (ii) the Agreed Percentage of the royalty payable to such third party for their sublicense, as well as
the Agreed Percentage of the carried interest. The Company will be required to pay the Standard Royalty to GTI if the percentage
of the equity of a third party that the Company (a) invests in, (b) has an option to invest in, or (c) receives
a carried interest in, exceeds the percentage of the third party specified in the preceding sentence.

The Company is required
to make an annual payment to GTI for each year of the term, with such annual payment due by the last day of January of the following
year; provided, however, that the Company is entitled to deduct all royalties paid to GTI in a given year under the GTI Agreement
from this amount, and if such royalties exceed the annual payment amount in a given year, the Company is not required to make the
annual payment. The Company accrues the annual royalty expense ratably over the calendar year as adjusted for any royalties paid
during year as applicable. The Company must also provide GTI with a copy of each contract that it enters into relating to a U-GAS®
system and report to GTI with its progress on development of the technology every six months.

For a period of ten years,
the Company and GTI are restricted from disclosing any confidential information (as defined in the GTI Agreement) to any person
other than employees of affiliates or contractors who are required to deal with such information, and such persons will be bound
by the confidentiality provisions of the GTI Agreement. The Company has further indemnified GTI and its affiliates from any
liability or loss resulting from unauthorized disclosure or use of any confidential information that the Company receives.

The GTI Agreement
expires on August 31, 2016, but may be extended for two additional ten-year periods at the Company’s option.

Note 4 – Stock-Based Compensation

As of December 31, 2014,
the Company had outstanding stock option and restricted stock awards granted under the Company’s Amended and Restated 2005
Incentive Plan, as amended (the “Incentive Plan”), under which the Company’s stockholders have authorized a total
of 12,000,000 shares of common stock for awards under the Incentive Plan. As of December 31, 2014, there were 1,535,683 shares
authorized for future issuance pursuant to the Incentive Plan. Under the Incentive Plan, the Company may grant incentive and non-qualified
stock options, stock appreciation rights, restricted stock units and other stock-based awards to officers, directors, employees
and non-employees. Stock option awards generally vest ratably over a one to four year period and expire ten years after the date
of grant.

Stock option activity during
the six months ended December 31, 2014 was as follows:

Shares of Common
Stock Underlying

Stock Options

Outstanding at June 30, 2014

7,702,550

Granted

506,025

Exercised

(117,500

)

[Forfeited

(20,000

)

Outstanding at December 31, 2014

8,071,075

Exercisable at December 31, 2014

7,294,769

17

The fair values for the
stock options granted during the six months ended December 31, 2014 were estimated at the date of grant using a Black-Scholes-Morton
option-pricing model with the following weighted-average assumptions:

Risk-free rate of return

1.61

%

Expected life of award

5.1 years

Expected dividend yield

0.00

%

Expected volatility of stock

85

%

Weighted-average grant date fair value

$

0.80

Stock warrants activity
during the six months ended December 31, 2014 were as follows:

Shares of Common
Stock Underlying

Stock Warrants

Outstanding at June 30, 2014

6,616,667

Granted

782,551

Exercised

—

Outstanding at December 31, 2014

7,399,218

The Company recognizes
the stock-based compensation expense related to the Incentive Plan awards and warrants over the requisite service period. The following
table presents stock based compensation expense attributable to stock option awards issued under the Incentive Plan and attributable
to warrants issued to consulting firms as compensation (in thousands):

Three Months Ended

Six Months Ended

December 31,

December 31,

2014

2013

2014

2013

Incentive Plan

$

229,160

$

152

$

514,312

$

485

Consultants

719,946

320

719,946

1,033

Total stock-based compensation expense

$

949,106

$

472

$

1,234,258

$

1,518

On November 1, 2013, the
Company entered into a management consulting agreement (the “MDC Agreement”) with Market Development Consulting Group,
Inc. d/b/a MDC Group (“MDC”) for communications and investor relations advisory services. As part of MDC’s consideration,
MDC received an initial warrant to acquire 750,000 shares of common stock on November 1, 2013 at an exercise price of $.70 per
share. The fair value of these warrants was estimated to be approximately $0.4 million. MDC will receive additional warrants (“Anniversary
Warrants”) to acquire 1% of the then fully diluted common stock on each annual anniversary prior to termination of the MDC
Agreement. The exercise price of each such Anniversary Warrant shall be equal to the average closing price over the twenty consecutive
trading days immediately preceding the anniversary. An Anniversary Warrant to acquire 782,551 shares at an exercise price of $1.00
per share was issued to MDC in November 2014

Note 5 – Net Loss Per Share

Historical net loss per
share of common stock is computed using the weighted average number of shares of common stock outstanding. Basic loss per share
excludes dilution and is computed by dividing net loss available to common stockholders by the weighted average number of shares
of common stock outstanding for the period. Stock options, warrants and unvested restricted stock are the only potential dilutive
share equivalents the Company has outstanding for the periods presented. For the three months and six months ended December 31,
2014 and 2013, options and warrants to purchase common stock were excluded from the computation of diluted earnings per share as
their effect would have been antidilutive as the Company incurred net losses during those periods.

Note 6 – Risks and Uncertainties

Any future decrease in
economic activity in China, India or in other regions of the world, in which the Company may in the future do business, could significantly
and adversely affect its results of operations and financial condition in a number of other ways. Any decline in economic conditions
may reduce the demand for prices from the products from our plants, thus the Company’s ability to finance and develop its
existing projects, commence any new projects and sell its products could be adversely impacted.

18

During the three months
ended December 31, 2014, there was a significant decline in methanol prices in the China commodity market, which put significant
pressure on our ZZ and Yima Joint Venture plant methanol production margins. As a result, the Company evaluated both operating
assets for potential impairment as of December 31, 2014. Based on this evaluation, the Company determined that the $32 million
carrying value of the ZZ Joint Venture facility was no longer entirely recoverable. Due to this impairment, the Company wrote down
the value of the facility to its estimated fair value of $11 millon and incurred an impairment expenses of $20.9 million. Fair
value was based on expected future cash flows using Level 3 inputs under ASC 820. The ZZ Joint Venture is currently not paying
all of its vendor payables, which is a breach of contract under the ZZ Cooperation Agreement. In addition, there are payments due
under the ZZ Line of Credit Agreement on April 8 and 9, 2015 for a combined total of $3.3 million, and payments due under the ZZ
Working Capital Loan on September 13, 2015 of $3.3 million. If the ZZ Joint Venture is unable to make these payments, it could
forfeit the plant and the restricted certificate of deposit amount of $1.6 million to the lenders. With respect to the Company’s
investment in the Yima Joint Venture, the Company performed a fair value analysis based on expected future cash flow, and concluded
that fair value exceeded the current book value of the Company’s investment in the Yima Joint Venture. While changes in market
conditions for methanol in China may increase the Company’s operating margins, any further degradation in methanol prices,
as well as changes in assumptions used to test for recoverability and to determine fair value, could result in additional impairment
charges in the future for the ZZ Joint Venture facility or an impairment related to the Yima investment.

The Yima Joint Venture
plant’s refined methanol section was commissioned in December 2013, and has operated at limited capacity since that date.
Methanol production was approximately 31% of its capacity during the three months ended December 31, 2014. The plant is designed
to produce 300,000 tonnes per year of methanol from operating two of its three available gasifiers and has achieved 100% peak
syngas production levels and 80% peak methanol production levels. The Yima Joint Venture initiated an outage in March 2014 intended
to allow the plant to make broad and miscellaneous improvements to many areas of the entire methanol producing facility which
had not been completed or properly installed. Many of these improvements were punch-list items left over from construction, along
with improvements which have been learned from the past year’s operation at the plant. Additionally, it was identified during
this time that the Yima Joint Venture has not installed all the required units related to removal of sulfur compounds from syngas.
A portion of these repairs were completed and the facility was restarted in late June 2014. After three weeks of operation the
plant was shut down again due to improper repair techniques on its Heat Recovery System Generator. The Company has limited influence
on the operating and financial policymaking of the Yima Joint Ventures. There can be no assurances that the Yima Joint Ventures’
operations will be profitable or that dividends will be paid to the Company. There have been a variety of minor construction related
shutdowns which are normally seen in the startup of these types of facilities, but the shutdowns have generally not been related
to the gasifier systems. In addition, the Yima Joint Ventures still owe the Company approximately $0.67 million for certain gasifiers
and gasifier related equipment delivered in 2012, a portion of which is due from the Company to TST and the balance to a second
vendor for providing equipment associated with the gasifiers. It is unclear when or if the balance of this money will be paid
to the Company from the Yima Joint Venture.

The Company has made significant
progress recently on partnering its China business through the TSEC Joint Venture, including through the recently announced projects
with Innovative Coal Chemical Design Insitute, ICCDI, a subsidiary of TST, and Aluminum Corporation of China for an industrial
syngas project, as well as with Dengfeng Power Group Co., Ltd. for a planned 160 MW distributed power generation program initially
in Henan Province, China. However, the Company expects to continue to have negative operating cash flows until it can generate
sufficient cash flows from its technology, equipment and services business and SES China (including the ZZ Joint Venture, the
Yima Joint Ventures and the TSEC Joint Venture) to cover its general and administrative expenses and other operating costs. In
addition, the Company may need to aggressively pursue additional partners in China and may need to seek other equity financing
or reduce its operating expenses. The Company will also limit the development of any further projects until it has assurances
that acceptable financing is available to complete the project.

19

The majority of our revenues
are derived from the sale of methanol in China. We do not have long term offtake agreements for these sales, so revenues fluctuate
based on local market spot prices, which have been under significant pressure and are generally not consistent or predictable.
We remain unsure of how much longer this downward market pressure will continue or where methanol prices will eventually stabilize.
Our liquidity and capital resources will be materially adversely affected if markets remain under pressure, and we are unable to
obtain satisfactory process for these commodities or if prospective buyers do not purchase these commodities

The Company currently
plans to use its available cash for (i) securing a partner for its technology business vertical; (ii) securing orders and other
associated tasks associated with the Company’s distributed power initiatives such as in China with Dengfeng Power and in
Pakistan with General Electric; (iii) executing the Company’s strategy to develop market based business verticals; (iv) general
and administrative expenses; (v) repaying the ZZ Short-term Loan and the ZZ Workign Capital Loan; and (vi) working capital and
other general corporate purposes. Although the Company intends for the ZZ Joint Venture to sustain itself through its own earnings,
the Company may also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations until
the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service. The actual allocation and timing
of these expenditures will be dependent on various factors, including changes in the Company’s strategic relationships, commodity
prices and industry conditions, and other factors that the Company cannot currently predict. In particular, any future decrease
in economic activity in China or in other regions of the world in which the Company may in the future do business could significantly
and adversely affect our results of operations and financial condition. Operating cash flows from the Company’s joint venture
operating projects can be positively or negatively impacted by changes in coal and methanol prices. These are commodities where
market pricing is often volatile in nature.

The Company does not currently
have all of the financial and human resources to fully develop and execute on all of its other business opportunities; however,
the Company intends to finance their development through paid services, technology access fees, equity and debt financings and
by securing financial and strategic partners focused on development of these opportunities. The Company can make no assurances
that its business operations will provide it with sufficient cash flows to continue its operations. The Company may need to raise
additional capital through equity and debt financing for any new ventures that are developed, to support its existing projects
and possible expansions thereof and for its corporate general and administrative expenses. The Company is considering a full range
of financing options in order to create the most value in the context of the increasing interest the Company is witnessing in its
proprietary technology. The Company cannot provide any assurance that any financing will be available to it in the future on acceptable
terms or at all. Any such financing could be dilutive to its existing stockholders. If the Company cannot raise required funds
on acceptable terms, it may not be able to, among other things, (i) maintain its general and administrative expenses at current
levels including retention of key personnel and consultants; (ii) successfully develop its licensing and related service businesses;
(iii) negotiate and enter into new gasification plant development contracts and licensing agreements; (iv) make additional capital
contributions to its joint ventures; (v) fund certain obligations as they become due; or (vi) respond to competitive pressures
or unanticipated capital requirements.

The Company is subject
to concentration of credit risk with respect to our cash and cash equivalents, which it attempts to minimize by maintaining cash
and cash equivalents with major high credit quality financial institutions. At times, the Company’s cash balances in a particular
financial institution may exceed limits that are insured by the U.S. Federal Deposit Insurance Corporation or equivalent agencies
in foreign countries such as Hong Kong.

Note 7 – Segment Information

The Company’s reportable
operating segments have been determined in accordance with the Company’s internal management reporting structure and include
SES China, Technology Licensing and Related Services, and Corporate. The SES China reporting segment includes all of the assets
and operations and related administrative costs for China including initial closing costs relating to our joint ventures. The
Technology Licensing and Related Services reporting segment includes all of the Company’s current operating activities outside
of China. The Corporate reporting segment includes the executive and administrative expenses of the corporate office in Houston.
The Company evaluates performance based upon several factors, of which a primary financial measure is segment operating income
or loss.

20

The following table presents
statements of operations data and assets by segment (in thousands):

Three
Months Ended

Six
Months Ended

December
31,

December
31,

2014

2013

2014

2013

Revenue:

SES
China

$

3,882

$

5,914

$

8,096

$

5,914

Technology
licensing and related services

—

—

—

—

Total
revenue

$

3,882

$

5,914

$

8,096

$

5,914

Depreciation
and amortization:

SES
China

$

521

$

516

$

1,042

$

1,031

Technology
licensing and related services

50

47

100

94

Corporate
& other

1

2

3

5

Total
depreciation and amortization

$

572

$

565

$

1,145

$

1,130

Operating income
(loss):

SES
China

$

(23,525

)

$

402

$

(26,162

)

$

(2,262

)

Technology
licensing and related services

(643

)

(256

)

(1,240

)

(346

)

Corporate
& other

(1,945

)

(1,482

)

(3,205

)

(2,858

)

Total
operating loss

$

(26,113

)

$

(1,336

)

$

(30,607

)

$

(5,466

)

Interest expense:

SES
China

$

74

$

122

$

138

$

192

Total
interest expense

$

74

$

122

$

138

$

192

Equity in losses
of joint ventures:

SES
China

$

—

$

—

$

—

$

—

Corporate
& other

—

—

—

1

Total
equity in losses of joint venture

$

—

$

—

$

—

$

1

December 31,
2014

June 30,
2014

Assets:

SES China

$

50,021

$

76,316

Technology licensing and related services

932

943

Corporate & other

15,557

14,447

Total assets

$

66,510

$

91,706

21

Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.

You should read the
following discussion and analysis of our financial condition and results of operations together with our consolidated financial
statements and the related notes and other financial information included elsewhere in this quarterly report. Some of the information
contained in this discussion and analysis or set forth elsewhere in this quarterly report, including information with respect to
our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.
You should review the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014
for a discussion of important factors that could cause actual results to differ materially from the results described in or implied
by the forward-looking statements contained in the following discussion and analysis.

Business Overview

We are a global energy
and gasification technology company that provides proprietary gasification technology systems and solutions to the energy and chemical
industries.

Our business strategy
is to create value by supplying our technology, equipment and services into global projects where lower cost low quality coals,
coal wastes, municipal wastes, agricultural biomass, and other biomass feedstocks can be profitably converted through our proprietary
gasification technology into clean synthesis gas, or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which
is then used to produce a variety of high value energy and chemical products. Our initial operating projects to date convert high
ash coal and coal wastes to chemical grade methanol, and we are pursuing a variety of additional global projects under development
by customers who may use our technology platform to convert low quality coals such as lignite, coal wastes, municipal wastes and
agricultural waste biomass to high value products such as electric power, transportation fuels, substitute natural gas, or SNG,
fuel for direct reduction iron, or DRI, steel making and other products. Our technology is originally based on the U-GAS
®
process developed by the Gas Technology Institute and we have augmented and differentiated the technology through newly developed
intellectual property related to design, detailed engineering, constructing, starting up and operating our two commercial joint
venture plants in China.

Our technology can
cleanly and economically extract carbon and hydrogen from most types of coal resources, coal wastes and renewable forms of biomass
and municipal wastes. This carbon and hydrogen is extracted in the form of synthesis gas, called syngas. Our syngas is then readily
converted into a wide range of fundamental energy and chemical products. These products include, but are not limited to, electric
power, natural gas (methane), transportation fuels such as gasoline, diesel and jet fuel, chemicals such as methanol, olefins,
and glycols, ammonia and urea for agricultural fertilizers and feedstocks for steel making. Our technology is part of a family
of gasification technologies which have been used successfully in industrial applications for many years. However, our technology
is meaningfully differentiated over these older forms of gasification primarily through its ability to create clean and economical
syngas from most forms of coal resources—from the lowest quality brown coals and lignites , high ash sub-bituminous coals
and including the highest quality bituminous and anthracite coals—as well as biomass and other renewable waste materials.
Our most recent development is the SES XL3000 gasification system introduced in October 2014. It is specifically targeted to provide
higher syngas capacity and delivery pressure with lower specific capital costs, while maintaining high carbon to syngas conversion
ratios with high syngas generation efficiency on both high and low quality coals. The XL3000 is targeted to deliver efficiency
and economy in performance required to meet the needs of the wide range of the world's syngas projects:
distributed
power, direct reduced iron, or DRI, steelmaking, industrial chemicals, fertilizers, synthetic natural gas, and transportation fuels
.
The XL3000 gasification system delivers approximately 250% higher syngas capacity than our previous designs with delivery pressures
up to 55 bar pressure, driving lower specific capital costs per unit.

We
intend to further commercialize our technology through supplying our gasification systems, which consist of technology, equipment
and services to projects globally via value accretive partnerships and collaborations with other companies operating in the energy
and chemical market segments in which we believe our technology is highly advantaged. This is a low capital intensity business
approach which we believe can generate attractive margins for us through providing our technology differentiated equipment and
services in multiple market segments globally with a potential to build meaningful sales opportunities over time. To date our principal
operating activities have focused in China where we have invested and built two commercial projects and recently entered into a
joint venture designed to establish our gasification technology as the leading gasification technology in China and other territories
in Asia. We made these investments to fully demonstrate our technology and our capabilities to build and operate, but with this
step of commercializing our technology successfully completed, we no longer intend to make such extensive capital investments in
the foreseeable future.

22

Our
business model is to deploy our technology on a global basis via supplying a technology package, containing license rights to operate
a project using our technology, gasification system equipment, and technology related services. As part of our overall strategy
we intend to form strategic regional and market-based partnerships or business verticals where our technology offers advantages
and through cooperating with these partners grow an installed base of projects. Through collaborative partnering arrangements we
believe we will commercialize our technology much faster than entering these markets alone. In addition to regional business units,
we are continuing to evaluate and develop our business in markets such as power, steel, fuels, substitute natural gas, chemicals
and renewables which can benefit from deploying our technology offering to create these products from low cost coal and renewable
feedstocks. We are developing these market-based business vertical opportunities together with strategic partners which have established
businesses or interests in these markets with the goal of growing and expanding these businesses by partnering with us and deployment
of our technology offering.

Our
ZZ Joint Venture project is our first commercial scale coal gasification plant and is located in Shandong Province, China. It achieved
commercial operation in December 2008. The ZZ Joint Venture is designed to produce clean syngas for sale to an immediately adjacent
industrial company which manufactures methanol from the syngas. Under the new commercial structure completed effective October
31, 2013, we assumed control of XE’s methanol facilities and the ZZ Joint Venture plant is operating as an integrated plant
which converts coal to syngas and then converts syngas and coke oven gas into methanol, as described in more detail under “Note
2 –Joint Ventures– Zao Zhuang Joint Venture” to our consolidated financial statements. During the quarter ended
December 31, 2014, and as discussed further under “Current Operations and Projects – Zao Zhoang Joint Venture,”
we incurred impairment expense associated with the write down of the value of the ZZ Joint Venture facility to its fair value.

The
Yima Joint Venture project in Henan Province, China generated its first methanol production in December 2012, and is currently
in its start-up phase as described in more detail under “Note 2 –Joint Ventures-Yima Joint Venture” to our consolidated
financial statements. The Yima Joint Venture plant’s refined methanol section was fully commissioned in December 2013, and
has operated at limited capacity since that date. Methanol production was approximately 31% of its capacity during the three months
ended December 31, 2014. The plant is designed to produce 300,000 tonnes per year of methanol from operating two of its three available
gasifiers and has achieved 100% peak syngas production levels and 80% peak methanol production levels.

We
also recently completed the formation of the TSEC Joint Venture, our China joint venture with TST. The purpose of the TSEC Joint
Venture is to establish our gasification technology as the leading gasification technology in the TSEC Joint Venture territory
(which is initially China, Indonesia, the Philippines, Vietnam, Mongolia and Malaysia) by becoming a leading provider of proprietary
equipment for the technology. The scope of the TSEC Joint Venture is to market and license our gasification technology via project
sublicenses; procurement and sale of proprietary equipment and services; coal testing; and engineering, procurement and research
and development related to the technology. As discussed further below under “-Current Operations and Projects – TSEC
Joint Venture,” we have seen the first potential projects emerge with Innovative Coal Chemical Design Insitute and Dengfeng
Power Group.

Our collaboration
with GE Packaged Power, Inc., a subsidiary of GE, which began in early 2013 to jointly evaluate and market a small scale power
generation unit combining our gasification technology with GE’s aeroderivative gas turbines, is an ongoing example of our
market-based business vertical developments underway. We, along with our distributed power collaborators, GE, ISTROENERGO GROUP,
Inc. and TUTEN Ltd, have signed our first letter of intent, or LOI, with K-Electric (formerly known as Karachi Electric Supply
Company), or KESC. KESC is a large electric utility company in Karachi, Pakistan with over 2.3 GW of installed electric generating
capacity. The exclusive LOI calls for a feasibility engineering and financial evaluation of a coal gasification power generation
project with a capacity between 90 and 200 MW to be constructed near Karachi. The completed feasibility study will serve as the
basis for further discussions and negotiations for a syngas power plant contract. In addition, as mentioned above, in December
2014, we and TSEC signed a Framework Agreement with Dengfeng Power Group for a series of engineering and evaluation steps for a
160MW distributed power generation plant intended to utilize the combineation of our gasification technology and GE LM2500+G4 technology
platforms with the gasification equipment provided by TSEC. We believe the distributed power segment offers opportunity over time
to provide meaningful sales opportunities for our gasification technology and equipment systems, and we intend to focus on the
continued development of this business vertical.

We are also advancing
developments via technology integration studies with potential partners for business verticals in DRI steel and “green”
chemicals derived from municipal wastes. We have also formalized agreements with Simon India Ltd., a subsidiary of the Adventz
Group, for marketing our technology in India which we believe is an important growth region for which our technology is uniquely
well suited.

23

We have also entered
into an exclusive agreement with TSEC and Midrex for the joint marketing of coal gasification-based DRI facilities in China. These
facilities will combine our gasification technology with the Direct Reduction Process of Midrex to create syngas from low quality
coals in order to convert iron ore into high-purity DRI. TSEC will aid in the marketing of these DRI facilities in China and will
supply the gasification equipment and licensing of the technology.

We
are also actively seeking a partner for our technology vertical with existing businesses and vested interest in the growth of the
global energy and chemicals projects who also has financial strength, a strong global sales force and demonstrated experience in
process or power industry engineering and technology deployment are target candidates for this cooperation with us.

Our ZZ Joint Venture
plant produces clean syngas which is blended with coke oven gas, or COG, to produce chemical-grade methanol, or MeOH. This methanol
is sold into the local methanol market in Shandong Province, China. The history of the ZZ Joint Venture and the commercially
restructured facility is described in more detail under “Current Operations and Projects– Zao Zhuang Joint Venture.
Key elements of our business strategy for the plant are:

a)

Operating at the highest possible production rates,
based on market conditions, to maximize the financial results from the facility.

b)

Maximizing the operation of our gasification systems
at the ZZ Joint Venture within local market constraints and continue to demonstrate the robustness and efficient capability
of our technology.

c)

Evaluating, advancing and closing new partnering and/or
expansion alternatives for improving the financial results of the ZZ Joint Venture, which may include additional downstream
technologies to produce high value products at the site.

d)

Secure alternative and increased sources of COG to aid increased production rates and lower production
costs, as well as to seek to restructure the existing Cooperation Agreement to reflect the current methanol market situation.

e)

Selective testing of new inventions at the ZZ Joint
Venture that will benefit the joint venture and our future gasification projects.

f)

Continuously improving and innovating at the ZZ Joint Venture to lower production costs and improve
operating margins.

g)

Considering other options for gasifiers at the plant, including repurposing by moving to another
location.

Yima Joint Venture

The Yima Joint Venture
plant generated its first methanol production in December 2012. The Yima Joint Venture plant’s refined methanol section was
fully commissioned in December 2013, and has operated at limited capacity since that date. The plant is designed to produce 300,000
tonnes per year of methanol from operating two of its three available gasifiers and has achieved 100% peak syngas production levels
and 80% peak methanol production levels. This plant is intended to provide a commercial demonstration of our technology as deployed
on a much larger scale than the ZZ Joint Venture plant.

We own 25% of the
Yima Joint Ventures and Yima Coal Industry (Group) Co., Ltd., or Yima, owns 75%. Yima controls the construction, startup and operation
of the plant. Recently, Yima put in place a new facility management structure, which we believe will significantly improve the
operations of the facility. We believe the fundamental value of the Yima Joint Ventures is sound due to (1) the preferential coal
pricing Yima can provide to the facility, (2) our technology’s capability to efficiently gasify this low quality coal and
(3) the benefits derived from the plant’s large scale. More detail is available under “Current Operations and Projects
– Yima Joint Ventures”. Key elements of our business strategy for the Yima plant are:

a)

Achieving formal commercial acceptance of the entire
facility including documented acceptance of the performance of our technology at Yima.

b)

Explore ways to monetize our investment in Yima.

c)

Achievement of safe, compliant, full-design annual methanol production rates and overall profitable
operation which can lead to dividend distributions to the shareholders of the joint venture.

The purpose of the
TSEC Joint Venture is to establish our gasification technology as the leading gasification technology in the TSEC Joint Venture
territory (which is China, Indonesia, the Philippines, Vietnam, Mongolia and Malaysia) by becoming a leading provider of proprietary
equipment for the technology. The scope of the TSEC Joint Venture is to market and license our gasification technology via project
sublicenses; procurement and sale of proprietary equipment and services; coal testing; and engineering, procurement and research
and development related to the technology. In addition, we believe our TSEC Joint Venture will also help build new partnerships
within market segments such as DRI steel, power, transportation fuels and for longer term value creation, larger scale SNG projects
utilizing low rank coal resources and biomass where our technology brings, and accelerate the commercialization of our technology
on a global basis enabling us to reduce the capital requirements to achieve this acceleration. We own a 35% interest in the TSEC
Joint Venture. More detail is available under “Current Operations and Projects – TSEC Joint Venture”
.
Key
elements of our business strategy for TSEC are:

a)

Achieve initial orders for new project license and
equipment supply.

b)

Secure first customers for our higher pressure 40bar
gasification platform, with a focus on brown field projects which could move quickly to install and operate the 40 bar system.

c)

Expand the scope of supply of the TSEC joint venture
to grow from licenses and proprietary equipment supply into supply of non-proprietary process equipment into TSEC projects.

d)

Expand the TSEC engineering and construction capability
together with TST to provide fully constructed fixed priced gasification systems in the territory.

e)

Endeavor to form collaborations and partnerships in market segments with known leaders in those
markets to help advance our technology, such as our exclusive marketing agreement with the TSEC Joint Venture and Midrex Technologies
for coal gasification-based DRI and our framework agreement with Dengfeng Power for a planned 160 MW power generation plant.

We believe that compatible
and strategic partners will help us grow and accelerate deployment of our technology, engineering, equipment and services into
global projects much faster and with better overall market penetration capability and value generation than if we were to continue
on our own. As a result, we are actively seeking such a partner and intend to complete this undertaking within the next two to
three quarters. Potential partners with existing businesses and vested interest in the growth of the global energy and chemicals
projects who also has financial strength, a strong global sales force and demonstrated experience in process or power industry
engineering and technology deployment are target candidates for this cooperation with us.

We believe that partnering
to enable the development of gasification projects, which can benefit from our technology’s capability regarding low cost
feedstock flexibility, lower capital cost and reduce water usage footprint, can provide value through creating a channel for us
to secure new orders and the ability to share in project development fees and/or achieve carried interests in projects. We believe
that we have the greatest competitive advantage by using our gasification technology in situations where there is a ready source
of low quality coal, coal waste or biomass to utilize as a feedstock. In many cases such low cost resources are not a viable energy
source without our technology’s capability to convert the resource into syngas and resulting energy and chemical products.

As our business verticals
and other business initiatives develop and we secure new technology orders, we believe we may need to add significant implementation
capability to follow through with fulfillment and implementation and increase our ability to provide the necessary financial and
performance guarantees required by project customers and equity and debt financiers. We intend to seek new and impactful partnering
opportunities to provide this needed capability in similar fashion to our TSEC Joint Venture in China.

25

Continue to
develop and improve our technology
.

We are continually
seeking to advance and improve our gasification technology, such as through our new XL3000 gasification system. We are continuing
to work with our prospective customers to determine the suitability of their low rank coals for our technology through proprietary
coal characterization testing and bench scale gasification tests. We are advancing our higher pressure 40bar to 60bar gasification
system designs which can further enhance our capital and operating expenses effectiveness and allow our system to achieve much
higher syngas output from a smaller sized gasifier. Additionally, we are growing our technology base through (i) continued development
of know-how with our engineering and technical staff, (ii) growing and protecting our trade secrets as a result of patenting improvements
tested at our ZZ and Yima Joint Venture plants, (iii) developing improvements resulting from integration of our technology with
downstream processes, and (iv) developing improvements resulting from scaling up the design of our technology in pressure and capacity.
Examples of our technology development include our High Pressure Gasifier, Fines Management System and Ash Management System which
increase overall efficiency. We have several patent applications pending relating to these technology improvements in addition
to a number of other improvements to increase the gasifier availability and to lower the costs of the gasifier installation and
subsequent operations.

Results of Operations

Three Months Ended December 31, 2014
Compared to the Three Months Ended December 31, 2013

Revenue
. Total
revenue was $3.9 million for the three months ended December 31, 2014 compared to $5.9 million for the three months ended December
31, 2013.

Our ZZ Joint Venture
began producing and selling methanol in November 2013 and sold 12,268 tonnes of methanol and generated approximately $3.7 million
of revenue during the three months ended December 31, 2014 compared with 10,127 tonnes of methanol sold and generated approximately
$4.4 million of revenue during the three months ended December 31, 2013. The decrease in revenue was primarily due to a 30
% decrease in methanol prices during the three months ended December 31, 2014 when compared to the three months ended December
31, 2013. Pursuant to the ZZ Cooperation Agreement, prior payments of approximately $1.8 million from Xuejiao were applied to settling
the prior payments due under the syngas purchase and sale agreement, as a result, the ZZ Joint Venture recognized these related
party advances as product sales of approximately $1.5 million, net of value-added taxes, during the three months ended December
31, 2013.

Technology licensing
and related services revenue was $0.2 million for the three months ended December 31, 2014, which resulted from technical consulting
and engineering services provided to our TSEC Joint Venture. There was no technology licensing and related services revenue for
the three months ended December 31, 2013.

Costs of sales
and plant operating expenses.
Costs of sales and plant operating expenses increased to $5.3 million for the three months ended
December 31, 2014 compared to $4.0 million for the three months ended December 31, 2013. The increase was primarily due to the
costs incurred for the ZZ Joint Venture’s production of methanol from coke oven gas purchased from Xuecheng Energy, including
electricity, coke oven gas, labor and other operating costs.

General and administrative
expenses.
General and administrative expenses increased by $0.1 million to $2.3 million for the three months ended December
31, 2014 compared to $2.2 million for the three months ended December 31, 2013. The increase was due primarily to the loss of approximately
$0.1 million incurred to write down our ZZ Joint Venture’s inventory to the current fair market value resulting from the
decline of methanol price in China market. Recurring general and administrative expenses consist primarily of compensation, professional
and consulting fees, travel, and other costs of our corporate, development and administrative functions in Houston and Shanghai,
and project and technical development expenses.

Stock-based compensation
expense.
Stock-based compensation expense increased by $0.4 million to $0.9 million for the three months ended December 31,
2014 compared to $0.5 million for the three months ended December 31, 2013. The increase was due primarily to the expensing of
approximately $0.7 million for the fair value of warrants issued in connection with our consulting agreement with MDC in November
2014 compared to the expensing of only approximately $0.4 million for the fair value of warrants issued to MDC in November 2013.

Depreciation and
amortization expense.
Depreciation and amortization expense was $0.6 million for both of the three months ended December 31,
2014 and 2013 and was primarily related to depreciation of our ZZ Joint Venture plant’s assets.

Impairment of ZZ
Joint Venture Plant.
Impairment of the ZZ Joint Venture Plant was recognized for the three months ended December 31, 2014 of
approximately $20.9 million (see “-Current Operations and Projects – Zao Zhuang Joint Venture”).

26

Foreign currency
gains
. Foreign currency gain was $36,000 for the three months ended December 31, 2014 compared to $31,000 for the three months
ended December 31, 2013. These amounts resulted from the appreciation of the Renminbi Yuan relative to the U.S. dollar.

Interest expense.
Interest expense decreased to $74,000 for the three months ended December 31, 2014 compared to $0.1 million for the three months
ended December 31, 2013. For the three months ended December 31, 2014, our interest expense relates to the ZZ Working Capital Loan
(as defined under “–Liquidity and Capital Resources”) with the ZaoZhuang Bank Co. Ltd., or ZZ Bank. For the three
months ended December 31, 2013, our interest expense related to ZZ Joint Venture’s loans with Industrial and Commercial Bank
of China, or ICBC, and the ZZ Short-term Loan (as defined under “–Liquidity and Capital Resources”) with ZZ Bank.
The ZZ Joint Venture repaid its final principal payment of RMB 7.3 million (approximately $1.2 million) to ICBC in January 2014
and repaid its principal of approximately $3.3 million for the ZZ Short-term Loan in September 2014. The decrease in interest expense
was due primarily to the lower principal outstanding as of December 31, 2014.

Six Months Ended December 31, 2014 Compared to the Six
Months Ended December 31, 2013

Revenue
. Total
revenue increased to $8.1 million for the six months ended December 31, 2014 compared to $5.9 million for the six months ended
December 31, 2013.

Our ZZ Joint Venture
began producing and selling methanol in November 2013 and sold 25,117 tonnes of methanol and generated approximately $7.9 million
of revenue during the six months ended December 31, 2014 compared with 10,127 tonnes of methanol sold and generated approximately
$4.4 million of revenue during the six months ended December 31, 2013. Pursuant to the ZZ Cooperation Agreement, prior payments
of approximately $1.8 million from Xuejiao were applied to settling the prior payments due under the syngas purchase and sale agreement,
as a result, the ZZ Joint Venture recognized these related party advances as product sales of approximately $1.5 million, net of
value-added taxes, during the three months ended December 31, 2013.

Technology licensing
and related services revenue was $0.2 million for the six months ended December 31, 2014, which resulted from technical consulting
and engineering services provided to our TSEC Joint Venture. There was no technology licensing and related services revenue for
the six months ended December 31, 2013.

Costs of sales
and plant operating expenses.
Costs of sales and plant operating expenses increased by $6.9 million to $11.0 million for the
six months ended December 31, 2014 compared to $4.1 million for the six months ended December 31, 2013. The increase was due principally
to the ZZ Joint Venture producing and selling methanol until November 2013, the cost incurred for production of methanol from coke
oven gas purchased from Xuecheng Energy, those costs include electricity, coke oven gas, labor and other operating costs. In addition,
the ZZ Joint Venture incurred costs of approximately $0.4 million during the six months ended December 31, 2013 for non-routine
repairs and retrofit expenses incurred for the new operations and restart of its syngas plant.

General and administrative
expenses.
General and administrative expenses decreased by $0.2 million to $4.4 million for the six months ended December 31,
2014 compared to $4.6 million for the six months ended December 31, 2013. The decrease was due primarily to a reduction of consulting
expenses resulted from the termination of our consulting agreement with Crystal Vision Energy Limited, or CVE, as of August 31,
2013 and reductions in employee related compensation cost resulted from reducing headcount in China. Recurring general and administrative
expenses consist primarily of compensation, professional and consulting fees, travel, and other costs of our corporate, development
and administrative functions in Houston and Shanghai, and project and technical development expenses.

Stock-based compensation
expense.
Stock-based compensation expense decreased by $0.3 million to $1.2 million for the six months ended December 31, 2014
compared to $1.5 million for the six months ended December 31, 2013. The decrease was due primarily to the reduction of expensing
the excess of the fair value over the consideration paid for shares of common stock and warrants issued to CVE under a unit purchase
agreement due to the termination of the consulting agreement with CVE as of August 31, 2013 and offset, in part, by higher fair
values of warrants issued to MDC in November 2014 compared to the fair values of warrants issued to MDC in November 2013.

Depreciation and
amortization expense.
Depreciation and amortization expense was $1.1 million for both of the six months ended December 31,
2014 and 2013 and was primarily related to depreciation of our ZZ Joint Venture’s syngas plant assets.

Foreign currency
gain
. Foreign currency gain was $27,000 for the six months ended December 31, 2014 and $43,000 for the six months ended December
31, 2013. These amounts resulted from the appreciation of the Renminbi Yuan relative to the U.S. dollar.

Interest expense.
Interest expense was $0.1 million for the six months ended December 31, 2014 compared to $0.2 million for the six months ended
December 31, 2013. For the six months ended December 31, 2014, our interest expense relates to the ZZ Working Capital Loan and
the ZZ Short-term Loan with ZZ Bank. For the six months ended December 31, 2013, our interest expense related to ZZ Joint Venture’s
loans with ICBC, and the ZZ Short-term Loan with ZZ Bank. The ZZ Joint Venture repaid its final principal payment of RMB 7.3 million
(approximately $1.2 million) to ICBC in January 2014 and repaid its principal of approximately $3.3 million for the ZZ Short-term
Loan in September 2014. The decrease in interest expense was due primarily to the lower principal outstanding as of December 31,
2014.

Liquidity and Capital
Resources

We have financed our
operations to date through private placements of our common stock and in three public offerings: one in November 2007, one in June
2008 and one in March 2014. We have used the proceeds of these offerings primarily for the development of our technology, including
the investments in the ZZ Joint Venture and the Yima Joint Ventures, and to pay other business development and general and administrative
expenses. In addition, the ZZ Joint Venture had a loan agreement with ICBC which funded certain of its plant’s construction
costs, the ZZ Short-term Loan funded in September 2013 to finance costs related to the ZZ Cooperation Agreement, and the ZZ Working
Capital Loan funded in October 2014 for purchase of raw material. We do not currently have all of the financial resources necessary
to fully develop and execute on all of our business opportunities and, as discussed further under “–Outlook,”
we may need to raise additional capital through equity and debt financing for any new ventures that are developed, to support our
existing projects and possible expansions thereof and for our corporate general and administrative expenses.

As of December 31,
2014, we had $13.7 million in cash and cash equivalents and $3.6 million of working capital available to us. During the six months
ended December 31, 2014, we used $7.1 million in operating activities compared to $4.3 million for the six months ended December
31, 2013. We used $1.6 million in investing activities for the certificate of deposit required by ZZ Bank for securing the ZZ Line
of Credit Agreement and $0.3 million for capital expenditures related to the ZZ Cooperation Agreement for the six months ended
December 31, 2014 compared with $1.2 million for the six months ended December 31 2013. For the six months ended December 31, 2014,
we used $3.3 million in financing activities to repay the ZZ Short-term bank loan with ZZ Bank, and we used $1.2 million for the
scheduled semi-annual principal payments on the ZZ Joint Venture’s loan with ICBC for the six months ended December 31, 2013.
On October 2, 2014, the ZZ Joint Venture received approximately $3.3 million of working capital loan proceeds from ZZ Bank under
the ZZ Working Capital Loan. On October 8, 2014, the ZZ Joint Venture received a line of credit of approximately $2.5 million from
ZaoZhuang Bank and on October 9, 2014, the ZZ Joint Venture received an additional Line of credit of approximately $0.8 million
from ZZ Bank. Amounts owed to ZZ Bank are $3.3 million in April 2015 and $3.3 million in September 2015. It is expected that these
amounts will be paid out of ZZ Joint Venture funds.

We currently plan to
use our available cash for (i) securing a partner for our technology business vertical; (ii) securing orders and other associated
tasks associated with our distributed power initiatives such as in China with Dengfeng Power and in Pakistan with General Electric;
(iii) executing our strategy to develop market based business verticals, (iv) general and administrative expenses (v) repaying
the ZZ Short-term Loan and the ZZ Working Capital Loan and (vi) working capital and other general corporate purposes. Although
we intend for the ZZ Joint Venture to sustain itself through its own earnings, we may also need to make additional contributions
to the ZZ Joint Venture in order for it to meet its obligations until the ZZ Joint Venture generates sufficient cash flows to cover
its operating costs and debt service.

Short-term Loan Agreement with Zaozhuang Bank Co., Ltd

On September 10, 2013,
the ZZ Joint Venture entered into a short-term loan agreement with ZZ Bank (the “ZZ Short-term Loan”), and received
approximately $3.3 million of loan proceeds for the retrofit and related costs contemplated by the ZZ Cooperation Agreement. The
ZZ Joint Venture paid off the ZZ Short-term Loan in September 2014.

Working Capital Loan Agreement with Zaozhuang Bank Co., Ltd

On October 2, 2014,
the ZZ Joint Venture replaced the above ZZ Short-term Loan with a new working capital loan agreement with the ZZ Bank (the “ZZ
Working Capital Loan”), and received approximately $3.3 million of loan proceeds.

28

Key terms of the ZZ
Working Capital Loan are as follows:

•

Term of the loan is one year, due on September 23, 2015;

•

Interest is payable monthly at an annual rate of 9%;

•

Xuecheng Energy is the guarantor of the loan;

•

Certain assets of the ZZ Joint Venture, including land use rights and the administration building,
are pledged as collateral for the loan; and

•

Subject to customary events of default which, should one or more of them occur and be continuing,
would permit Zaozhuang Bank Co., Ltd. to declare all amounts owing under the agreement to be due and payable immediately.

Line of Credit (Deposit Secured Loan) with Zaozhuang Bank
Co., Ltd

On October 8, 2014,
the ZZ Joint Venture entered a Line of Credit Agreement with the ZZ Bank (the “ZZ Line of Credit Agreement”), and received
a line of credit of approximately $2.5 million. On October 9, 2014, the ZZ Joint Venture entered an additional Line of Credit Agreement
with ZZ Bank and received a line of credit of approximately $0.8 million.

Key terms of the two
lines of credit are as follows:

•

The ZZ Joint Venture is required to deposit 50% of the total face amount, or approximately $1.6
million, to the ZZ Bank for the line of credit as a security deposit;

•

Term of the lines of credit is six months, due on April 8 and April 9, 2015 respectively, and can
be renewed for another six months term with bank approval;

•

Service fee is 0.05% of the face amount for each renewal.

•

Xuecheng Energy is the guarantor of the line of credit;

•

Certain assets of the ZZ Joint Venture, including land use rights and the administration building,
are pledged as collateral for the lines of credit; and

•

Subject to customary events of default which, should one or more of them occur and be continuing,
would permit the the ZZ Bank to declare all amounts owing under the agreements to be due and payable immediately.

Xuecheng Energy’s
combined guarantee for both the ZZ Working Capital Loan and the ZZ Line of Credit Agreement is limited to approximately $3.3 million.

ZZ Joint Venture liquidity

Due to the low methanol
prices in China, the ZZ Joint Venture is currently not paying all of its vendor payables. In addition, there are payments due under
the ZZ Line of Credit Agreement on April 8 and 9 of 2015 for a combined total of $3.3 million, and payments due under the ZZ Working
Capital Loan on September 13, 2015 of $3.3 million. If the ZZ Joint Venture is unable to make these payments, it could forfeit
the plant and the restricted certificate of deposit amount of $1.6 million to the lenders.

Current Operations and Projects

Zao Zhuang Joint Venture

Joint Venture Agreement

On July 6, 2006,
we entered into a cooperative joint venture contract with Shandong Hai Hua Coal & Chemical Company Ltd., or Hai Hua, which
established Synthesis Energy Systems (Zao Zhuang) New Gas Company Ltd., or the ZZ Joint Venture, a joint venture company that has
the primary purposes of (i) developing, constructing and operating a syngas production plant utilizing the U-GAS
®
technology in Zao Zhuang City, Shandong Province, China and (ii) producing and selling syngas and the various byproducts of
the plant. In August 2012, Hai Hua’s name was changed to Shandong Weijiao Group Xuecheng Energy Company Ltd., or Xuecheng
Energy, after a change in control transaction. We own 97.6% of the ZZ Joint Venture and Xuecheng Energy owns the remaining 2.4%.
We consolidate the results of the ZZ Joint Venture in our consolidated financial statements.

29

On July 24, 2013, the
ZZ Joint Venture entered into a cooperation agreement (the “ZZ Cooperation Agreement”) with Xuecheng Energy and its
parent company, Shandong Xuejiao Chemical Co., Ltd. (collectively referred to as “Xuejiao”), which serves to supersede
the existing syngas purchase and sale agreement among the parties dated October 22, 2006 and supplemented previously in 2008. The
ZZ Cooperation Agreement, which became effective on October 31, 2013, represents the basis for an integrated syngas to methanol
operation and resolution of the nonpayment of the contractual capacity fees by Xuejiao. Under the terms of the ZZ Cooperation
Agreement, Xuejiao will (i) provide the ZZ Joint Venture with use of their methanol plant for ten years at no cost to the ZZ Joint
Venture, (ii) provide a bank loan guarantee of approximately $3.3 million for a majority of the financing necessary for the ZZ
Joint Venture for the retrofit and related costs of the ZZ Joint Venture plant, (iii) waive certain advances previously made to
the ZZ Joint Venture and (iv) supply discounted coke oven gas produced by its existing coke ovens to be used in combination with
synthesis gas to produce refined methanol from the new ZZ Joint Venture integrated syngas methanol operation. The new integrated
operation will be managed by the ZZ Joint Venture.

Effective October 31,
2013, the ZZ Joint Venture terminated and waived its claims to past due capacity fees owed by Xuejiao under the prior syngas purchase
and sale agreement. Pursuant to the ZZ Cooperation Agreement, prior payments of approximately $1.8 million were applied to
settling the prior payments due under the syngas purchase and sale agreement. As a result, the ZZ Joint Venture recognized these
related party advances as product sales of approximately $1.5 million, net of value-added taxes, during the year ended June 30,
2014.

The ZZ Joint
Venture began producing and selling methanol in November 2013 and sold 12,268 tonnes of methanol during the three months ended
December 31, 2014 generating approximately $3.7 million of revenue. We assumed operational control of the integrated methanol production
facility in October 2013 under a restructured commercial arrangement. The ZZ Joint Venture completed the plant retrofits and equipment
upgrades to enable increased methanol production from integrated syngas and coke oven gas feedstock. The ZZ Joint Venture is now
operating an integrated plant which has two operating modes where it (i) converts coke oven gas directly to methanol and (ii) converts
coal to syngas, then blends the syngas and coke oven gas at a specific ratio to produce additional quantities of methanol.
The ZZ Joint Venture began producing and selling methanol in November 2013 from coke oven gas. The ZZ Joint Venture restarted its
syngas plant for approximately two weeks during December 2013. The ZZ Joint Venture intends to manage syngas production in order
to optimize results. The syngas facility will generally operate when adequate coke oven gas supplies are available to achieve the
correct syngas to coke oven gas blend ratio. The ZZ Joint Venture also recently executed agreements to secure an additional minimum
4,000 normal cubic meters per hour of coke oven gas from a local supplier, with a target of 5,000 normal cubic meters per hour,
in order to increase methanol production and reduce supply risks. This additional coke oven gas represents approximately a 30%
increase in feedstock supply for the ZZ Joint Venture Plant. In addition, the Company is focused on lowering our operating costs,
as well as reducing forced outages at the facility.

Additionally, we are
also evaluating alternative products and partnership structures for a possible repurpose of the ZZ Joint Venture plant. In 2010,
the ZZ Joint Venture received the necessary government approval for an expansion into monoethylene glycol production. This expansion
project remains under evaluation by us. We are also evaluating certain new downstream technologies to produce high value products
and options for maximizing site asset value. We are also considering other options for the gasifiers at the plant, including repurposing
by moving to a new location, since methanol prices are in decline.

Current ZZ Operating
Description and Capability

As described above,
we assumed operational control of the integrated methanol production facility in October 2013 under a restructured commercial arrangement
pursuant to the ZZ Cooperation Agreement. The ZZ Joint Venture completed plant retrofits and equipment upgrades to enable increased
methanol production from integrated syngas and COG feedstock. The ZZ Joint Venture began producing and selling methanol in November
2013 and sold 12,268 tonnes of methanol during the three months ended December 31, 2014 generating approximately $3.7 million of
revenue. The ZZ Joint Venture restarted its syngas plant for approximately two weeks during December 2013. In January 2014, the
facility produced methanol from coke oven gas only due to coke oven gas supplies disruptions during the cold weather when COG was
diverted to the city gas loop for residential heating needs. We expect such diversions of COG into residential heating during the
winter months to be reduced or eliminated in the future due to local town gas system being upgraded to use pipeline natural gas.

30

We are experiencing methanol prices in China
and at our ZZ facility at near historic lows. Under these conditions the facility has operated primarily in the COG only mode.
We believe methanol prices have been at these recent low levels primarily related to both the general economic conditions in China
as demonstrated by China’s current low PMI and due to a correlation between methanol prices and oil prices.

Other non-market based factors affect economic
expectations at the ZZ Joint Venture facility such as but not limited to unscheduled maintenance, forced outages, catalyst degradation
and performance in both the COG reformer and methanol synthesis loop and third party coke oven outages which can curtail available
COG feedstock. The ZZ facility is limited to approximately 24 hours of COG storage.

Although we intend
for the ZZ Joint Venture to sustain itself through its own earnings, we may need to make additional contributions to the ZZ Joint
Venture in order for it to meet its obligations. In September 2014, we made a capital contribution of $1.5 million to the ZZ Joint
Venture. This capital contribution was used to pay a portion of the ZZ Short-term Loan, which was due on September 9, 2014.

During meetings with
the local government at Xuecheng in June 2014 and separate meetings with Xuejiao, the ZZ Joint Venture has been advised that the
existing Xuejiao coke oven facility may be permanently shutdown in the future. A definitive timeline has not been established for
this shutdown and the ZZ Joint Venture was informed that it may occur in the next 3 to 4 years. Xuejiao has constructed a new coking
coal facility about 20 kilometers away from the current facility and this new facility is intended to eventually replace the current
facility which has come under scrutiny for pollution from its old generation coking coal technology used. Because of this the ZZ
Joint Venture intends to develop its alternatives for continued production of methanol and other products from the facility. The
ZZ Joint Venture is expected to qualify as a clean industrial producer of chemicals such as methanol which can be expanded into
a clean industrial park once the existing coke ovens are removed. We are evaluating alternative products and partnership structures
for partnering and/or expansion of the ZZ Joint Venture plant. In 2010, the ZZ Joint Venture received the necessary government
approval for an expansion into mono-ethylene glycol production. This expansion project remains under evaluation by us. We are also
evaluating new downstream technologies to produce high value products at the site.

Impairment

During the three months
ended December 31, 2014, there was a significant decline in methanol prices in China. By December 31, 2014, methanol prices were
below 1,900 Rmb per tonne, which was a level not seen since November 2009. This significant decline in methanol prices generally
corresponded to the significant decline in global oil prices for the same quarter. Due to this reduction in methanol prices, the
ZZ Joint Venture’s gasification portion of the facility is no longer able to make a positive financial contribution to the
facility and has been turned off since December 2014 until such time as methanol prices increase.

The ZZ Joint Venture
plant is contractually obligated to take coke oven gas from Xuecheng Energy and Xuecheng Energy is under extreme financial pressure
because their coke oven gas operations are running at a loss in the current low steel price environment in China. Xuecheng Energy
is unable to shut down this operation and wait for improved steel prices. As a result, the ZZ Joint Venture is currently taking
the coke oven gas feedstock and managing the operation with cash and revenues coming solely from methanol sales which have been
adequate to pay fixed costs and third-party costs, except for the coke oven gas. As a result the ZZ Joint Venture is accruing a
payable for coke oven gas, which was $3.0 million as of December 31, 2014, and the ZZ Joint Venture anticipates negotiating a settlement
for this payable with Xuecheng Energy in the future.

Due to this significant
shift in the market for methanol, we were required to evaluate the ongoing value of the ZZ Joint Venture facility and, based on
this evaluation, we determined that the ZZ Joint Venture asset value is no longer entirely recoverable as of December 31, 2014.
Becasue of this, we have incurred an impairment expense of $20.9 million, reducing the value of the facility to a fair value of
$11 millon. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820. While changes in market conditions
for methanol in China may increase operating margins, any further reduction in methanol prices, as well as changes in assumptions
used to test for recoverability and to determine fair value, could result in additional impairment charges in the future for the
ZZ Joint Venture facility.

The primary reasons
that we recorded an impairment on the ZZ Joint Venture plant and not on Yima are (1) the Yima facility is significantly larger
than the ZZ Joint Venture plant, thus spreading our fixed costs over more units, (2) the Yima project is newer than the ZZ Joint
Venture plant, therefore has a longer remaining life, (3) Yima is less expensive to operate, since the coal at Yima is generally
purchased at a lower cost and (4) the ZZ Joint Venture plant operates primarily on COG, whereas Yima operates solely on syngas.

31

Yima Joint Ventures

In August 2009,
we entered into amended joint venture contracts with Yima, replacing the prior joint venture contracts entered into in October 2008
and April 2009. The joint ventures were formed for each of the gasification, methanol/methanol protein production, and utility
island components of the plant, or collectively, the Yima Joint Ventures. The amended joint venture contracts provide that: (i) we
and Yima contribute equity of 25% and 75%, respectively, to the Yima Joint Ventures; (ii) Yima will guarantee the repayment
of loans from third party lenders for 50% of the project’s cost and, if debt financing is not available, Yima is obligated
to provide debt financing via shareholder loans to the project until the project is able to secure third-party debt financing;
and (iii) Yima will supply coal to the project from a mine located in close proximity to the project at a preferential price
subject to a definitive agreement to be subsequently negotiated. In connection with entering into the amended contracts, we and
Yima contributed remaining cash equity contributions of $29.3 million and $90.8 million, respectively, to the Yima Joint
Ventures during the three months ended September 30, 2009. We and Yima shall share the profits, and bear the risks and losses,
of the joint ventures in proportion to our respective ownership interests..

In exchange for such
capital contributions, we own a 25% interest in each joint venture and Yima owns a 75% interest. Notwithstanding this, in connection
with an expansion of the project, we have the option to contribute a greater percentage of capital for the expansion, such that
as a result, we would have up to a 49% ownership interest in the Yima Joint Ventures.

The remaining capital
for the project has been funded with project debt obtained by the Yima Joint Ventures. Yima agreed to guarantee the project debt
in order to secure debt financing from domestic Chinese banking sources. We have agreed to pledge to Yima our ownership interests
in the joint ventures as security for our obligations under any project guarantee. In the event that the necessary additional debt
financing is not obtained, Yima has agreed to provide a loan to the joint ventures to satisfy the remaining capital needs of the
project with terms comparable to current market rates at the time of the loan.

Under the terms of
the joint venture agreements, the Yima Joint Ventures are to be governed by a board of directors consisting of eight directors,
two of whom were appointed by us and six of whom were appointed by Yima. The joint ventures also have officers that are nominated
by us, Yima and/or the board of directors pursuant to the terms of the joint venture contracts. The term of the joint venture shall
commence upon each joint venture company obtaining its business operating license and shall end 30 years after commercial
operation of the plant.

The Yima Joint Venture
plant generated its first methanol production in December 2012. The Yima Joint Venture plant’s refined methanol section was
commissioned in December 2013, and has operated at limited capacity since that date. The plant is designed to produce 300,000 tonnes
per year of methanol from operating two of its three available gasifiers and has achieved 100% peak syngas production levels and
80% peak methanol production levels. This plant is intended to provide a commercial demonstration of our technology as deployed
on a much larger scale than the ZZ Joint Venture plant.

The Yima Joint Venture initiated an outage
in March 2014 that was intended to allow the plant to make broad and miscellaneous improvements to many areas of the entire methanol
producing facility which had not been completed or properly installed. Many of these improvements were punch-list items left over
from construction, along with improvements which have been learned from the past year’s operation at the plant. Additionally,
it was identified during this time that the Yima Joint Venture has not installed all the required units related to removal of sulfur
compounds from syngas. A portion of these repairs were completed and the facility was restarted in late June 2014. After three
weeks of operation the plant was shut down again due to improper repair techniques on its Heat Recovery System Generator. The plant
continues to run at approximately 30% to 50% of design capacity as data is gathered and as repairs and construction continue to
be made to the facility.

We believe there is a consistent pattern
of the Yima Joint Venture management not demonstrating an understanding of the methanol facility operations and not sourcing available
expertise in China to improve the overall operations. We have witnessed operation of its gasifier systems at Yima with design and
operating parameter deviations from our existing technology recommendations. We have previously experienced limited ability to
influence the Yima Joint Ventures’ operating performance. Our conclusion regarding our lack of significant influence is based
on our interactions with the Yima Joint Ventures related to the start-up and operations and due to various other circumstances
including limited participation in operating and financial policymaking processes and our limited ability to influence technological
decisions.

As a result of these issues, HNECGC restructured
the management of the Yima Joint Ventures under the direction of the Henan Coal Gasification Company or Henan, which is an affiliated
company reporting directly to HNEGC. The ownership of the Yima Joint Ventures is unchanged. Henan currently has full authority
of day to day operational and personnel decisions at the Yima Joint Venture. The goal of the management restructuring is to provide
for a more experienced and efficient operations management system. The management team at Henan is experienced at running and optimizing
coal gasification facilities, and they currently operate other coal gasification facilities. We currently plan to rely upon and
assist Henan's management to achieve optimized operations and will continue to attempt to improve our influence on the Yima Joint
Ventures. Despite this, we believe the fundamental value of the Yima Joint Ventures remains sound due to (1) the preferential coal
pricing Yima can provide to the facility, (2) our technology’s capability to efficiently gasify this low quality coal and
(3) the benefits derived from the plant’s large scale.

32

During the three months
ended December 31, 2014, there was a significant decline in methanol price in China commodity market, which put pressure on our
Yima Joint Venture plant methanol production margins. Accordingly, the Company performed a fair value analysis based on expected
future cash flows. The results of the test indicated that the current estimated fair value of the Yima investment exceeded its
book value, and as a result, no impairment is required.

TSEC Joint Venture

Joint
Venture Summary

On February 14, 2014,
SES Asia Technologies Limited, one of our wholly owned subsidiaries, entered into a Joint Venture Contract (the “JV Contract”)
with Zhangjiagang Chemical Machinery Co., Ltd., which subsequently changed its name to Suzhou Tianwo Science and Technology Co.
Ltd. (“TST”), to form Jiangsu Tianwo-SES Clean Energy Technologies Limited (the “TSEC Joint Venture”).
The purpose of the TSEC Joint Venture is to establish our gasification technology as the leading gasification technology in the
TSEC Joint Venture territory (which is initially China, Indonesia, the Philippines, Vietnam, Mongolia and Malaysia) by becoming
a leading provider of proprietary equipment for the technology. The scope of the TSEC Joint Venture is to market and license our
gasification technology via project sublicenses; procurement and sale of proprietary equipment and services; coal testing; and
engineering, procurement and research and development related to the technology. TST contributed RMB 53,800,000 in April 2014 and
is required to contribute an additional RMB 46,200,000 within two years of contract execution for a total contribution of RMB 100,000,000
(approximately USD $16 million) in cash to the TSEC Joint Venture, and owns 65% of the TSEC Joint Venture, and we have contributed
an exclusive license to use of our technology in the TSEC Joint Venture territory pursuant to the terms of a Technology Usage and
Contribution Agreement entered into among the TSEC Joint Venture, TST and us (the “TUCA”) on the same date, and own
35% of the TSEC Joint Venture. Under the JV Contract, neither party may transfer their interests in the TSEC Joint Venture without
first offering such interests to the other party. Notwithstanding this, we have the right until 30 days after the first project
sublicense is entered into by the TSEC Joint Venture to transfer 5% of its interest to a financial investor. If we elect not to
transfer such 5% interest during that period, TST has the option to purchase such interest from us for RMB 10,000,000 (approximately
USD$1.6 million).

Through
the TSEC Joint Venture, we have partnered a significant portion of our China business with TST, a financially strong and highly
skilled Chinese chemical equipment manufacturing company which desired to invest into the growth of China’s clean energy
space and which recognized the opportunity afforded by our technology capability and business model. We believe partnering
with TST can accelerate the commercialization of our technology on a global basis and will enable us to reduce our capital requirements
to achieve this acceleration. In addition, our China business will not only support the growth of our TSEC Joint Venture but we
believe will also build new partnerships in China within market segments such as DRI steel, power, transportation fuels and for
longer term value creation, larger scale SNG projects utilizing low rank coal resources and biomass which our technology brings.
We intend to form business verticals where we can secure ownership positions in these market vertical partnerships that both help
build value for the TSEC Joint Venture and for our China business.

TSEC
Projects

In December 2014,
Innovative Coal Chemical Design Insitute, ICCDI, a subsidiary of TST, was awarded three projects from Aluminum Corporation of China,
Shandong Branch. The award calls for ICCDI to serve as the general contractor providing all engineering and construction of the
three projects. ICCDI has finalized two of the three definitive agreements for the projects and expects to finalize the third and
final definitive agreement by the end of our fiscal year. The Company’s technology systems are to be supplied by TSEC to
ICCDI and will be used to produce an expected combined total of approximately 175,000 normal cubic meters per hour of industrial
syngas as a clean energy fuel for three existing aluminum manufacturing plants, located in the Shandong, Henan and Shanxi provinces.
TSEC is is also undertaking the required engineering work now while also developing the required contracts with ICCDI for completion
of the three projects.

33

In December 2014, we
and TSEC entered into an agreement with Dengfeng Power Group Co., Ltd., or DFPG, for a distributed power generation program initially
in Henan Province, China. The first phase of the program will be a pre-feasibility study for the first of several planned 160 MW
distributed power plants designed to utilize two state-of-the-art SES XL3000 advanced fluidized bed gasification systems; gasification
equipment provided by TSEC, and four GE model LM2500+G4 aero-derivative gas turbines and related power generation equipment. Upon
the completion and successful results of the feasibility studies, and requisite government approvals, the first cleaner distributed
power plant is expected to be built in Dengfeng. It is intended to serve as a model for additional cleaner coal distributed power
generation projects in Dengfeng (up to 600 MW total), as well as elsewhere in Henan Province and in other regions of China. DFPG,
an industrial conglomerate specializing in thermal power generation whose products include aluminum, other non-ferrous metals and
cement, and who operates power generation plants and coal mines in Henan Province, is funding the program and will serve as the
owner and operator of the first project.

GTI Agreement

On November 5,
2009, we entered into an Amended and Restated License Agreement, or the GTI Agreement, with GTI, replacing the Amended and Restated
License Agreement between us and GTI dated August 31, 2006, as amended. Under the GTI Agreement, we maintain our exclusive
worldwide right to license the U-GAS
®
technology for all types of coals and coal/biomass mixtures with coal content
exceeding 60%, as well as the non-exclusive right to license the U-GAS
®
technology for 100% biomass and coal/biomass
blends exceeding 40% biomass.

In order to sublicense
any U-GAS
®
system, we are required to comply with certain requirements set forth in the GTI Agreement. In the preliminary
stage of developing a potential sublicense, we are required to provide notice and certain information regarding the potential sublicense
to GTI and GTI is required to provide notice of approval or non-approval within ten business days of the date of the notice from
us, provided that GTI is required to not unreasonably withhold their approval. If GTI does not respond within that ten business
day period, they are deemed to have approved of the sublicense. We are required to provide updates on any potential sublicenses
once every three months during the term of the GTI Agreement. We are also restricted from offering a competing gasification technology
during the term of the GTI Agreement.

For each U-GAS
®
unit which we license, design, build or operate for ourselves or for a party other than a sub-licensee and which uses coal or a
coal and biomass mixture or biomass as the feed stock, we must pay a royalty based upon a calculation using the MMBtu per hour
of dry syngas production of a rated design capacity, payable in installments at the beginning and at the completion of the construction
of a project, or the Standard Royalty. If we invest, or have the option to invest, in a specified percentage of the equity
of a third party, and the royalty payable by such third party for their sublicense exceeds the Standard Royalty, we are required
to pay to GTI an agreed percentage split of third party licensing fees, or the Agreed Percentage, of such royalty payable by such
third party. However, if the royalty payable by such third party for their sublicense is less than the Standard Royalty, we are
required to pay to GTI, in addition to the Agreed Percentage of such royalty payable by such third party, the Agreed Percentage
of our dividends and liquidation proceeds from our equity investment in the third party. In addition, if we receive a carried interest
in a third party, and the carried interest is less than a specified percentage of the equity of such third party, we are required
to pay to GTI, in our sole discretion, either (i) the Standard Royalty or (ii) the Agreed Percentage of the royalty payable
to such third party for their sublicense, as well as the Agreed Percentage of the carried interest. We will be required to pay
the Standard Royalty to GTI if the percentage of the equity of a third party that we (a) invest in, (b) have an option
to invest in, or (c) receive a carried interest in, exceeds the percentage of the third party specified in the preceding sentence.

We are required to
make an annual payment to GTI for each year of the term, with such annual payment due by the last day of January of the following
year; provided, however, that we are entitled to deduct all royalties paid to GTI in a given year under the GTI Agreement from
this amount, and if such royalties exceed the annual payment amount in a given year, we are not required to make the annual payment.
We accrue the annual royalty expense ratably over the calendar year as adjusted for any royalties paid during year as applicable.
We must also provide GTI with a copy of each contract that we enter into relating to a U-GAS
®
system and report
to GTI with our progress on development of the technology every six months.

For a period of ten
years, we and GTI are restricted from disclosing any confidential information (as defined in the GTI Agreement) to any person other
than employees of affiliates or contractors who are required to deal with such information, and such persons will be bound by the
confidentiality provisions of the GTI Agreement. We have further indemnified GTI and its affiliates from any liability or loss
resulting from unauthorized disclosure or use of any confidential information that we receive.

The GTI Agreement expires
on August 31, 2016, but may be extended for two additional ten-year periods at our option.

34

Outlook

Our strategies are
focused on securing a partner for our technology business vertical, the continuing progress of the ZZ Joint Venture’s methanol
production and commercial sales including the syngas plant’s restart, improving operations at the Yima Joint Venture, developing
our TSEC Joint Venture, sourcing suitable partners for our other business verticals and advancing and improving our gasification
technology, such as through our new XL3000 gasification system. Our business is to create value by supplying our technology, equipment
and services into global projects where lower cost low quality coals, coal wastes, municipal wastes, agricultural biomass, and
other biomass feedstocks can be profitably converted through our proprietary gasification technology into clean synthesis gas,
or syngas (a mixture of primarily hydrogen, carbon monoxide, and methane), which is then used to produce a variety of high value
energy, power, and chemical products.

Our business model
is to deploy our technology on a global basis via supplying a technology package, containing license rights to operate a project
using our technology, gasification system equipment, and technology related services. As part of our overall strategy we intend
to form strategic regional and market-based partnerships or business verticals where our technology offers advantages and through
cooperating with these partners grow an installed base of projects. Through collaborative partnering arrangements we believe we
will commercialize our technology much faster than entering these markets alone. This is a low capital intensity business
approach which we believe can generate attractive margins for us through providing our technology differentiated equipment and
services in multiple market segments globally with a potential to build meaningful sales opportunities over time. We also believe
that our technology business activities will help advance our capabilities and provide opportunities which may allow us to selectively
participate as equity partners in such projects in the future. Additionally, we are continuing to improve our technology in ways
we believe will enhance our competitive position. We are pursuing other possible technology licensing opportunities with third
parties allowing us to build on our capability as demonstrated at both the ZZ Joint Venture and the Yima Joint Venture. We are
focusing our efforts globally with our partners in countries with large low rank coal resources, but our principal operating activities
to-date have focused on China and India.

We believe that there
is currently a shift in the coal gasification business toward the use of low quality, and therefore low cost, coals for coal-to-energy
and chemicals projects. We believe China is a good example of this new direction in coal gasification. The energy and chemicals
landscape has been evolving rapidly with upward pressure on demand and increasing pressure to deliver improved environmental performance
while simultaneously delivering economics that will attract investment capital. World energy consumption is expected to increase
significantly over the next two decades and demand is heavily driven by non-OECD nations where developing economies require ever
increasing access to more energy products to establish healthy economies that improve the living conditions of those populations.
Our market research indicates that coal will be required as a major source of energy for decades to come and growth in coal usage
is expected to be led by the non-OECD nations. Because of these market dynamics, we believe our gasification technology has strategic
importance to countries and regions with developing economies which have their own low cost domestic coal resources and need access
to low cost clean energy and chemical products to grow. We believe this also applies to developed nations in the west such as Australia,
Europe and US which possess significant low cost coal resources and which have a strategic need and desire to produce clean and
affordable energy and chemicals from their own domestic resources and to existing operating companies which deploy their own technologies
for energy and/or chemicals production. We believe that our technology is well positioned to address the market needs of the changing
global energy landscape and we believe we are well positioned in Asia where we have two operating projects using five of our gasification
systems. In addition, the TSEC Joint Venture provides us with a strong Chinese partner already specialized in the manufacturing
and design of processing industry equipment and projects.

During the three months
ended December 31, 2014, there was a significant decline in methanol prices in China during the quarter ending December 31, 2014,
which caused an operating loss from our methanol production at the ZZ Joint Venture plant. Methanol prices at the end of December
2014 were below 1,900 Rmb per tonne, which was a level not seen since November 2009. This significant decline in methanol prices
generally corresponded to the significant decline in global oil prices for the same quarter. Due to this significant shift in the
market for methanol, we were required to evaluate the ongoing value of the ZZ Joint Venture facility and, based on this evaluation,
we determined that the ZZ Joint Venture asset value is no longer entirely recoverable as of December 31, 2014. Becasue of this,
we have incurred an impairment expense of $20.9 million, reducing the value of the facility to a fair value of $11 millon. While
changes in market conditions for methanol in China may increase operating margins, any further reduction in methanol prices, as
well as changes in assumptions used to test for recoverability and to determine fair value, could result in additional impairment
charges in the future for the ZZ Joint Venture facility.

35

We have made significant
progress recently on partnering our China business through the TSEC Joint Venture, including through the recently announced projects
with ICCDI, and Aluminum Corporation of China for an industrial syngas project, as well as with Dengfeng for a planned 160 MW distributed
power generation program initially in Henan Province, China. However, we expect to continue to have negative operating cash flows
until we can generate sufficient cash flows from our technology, equipment and services business and SES China (including the ZZ
Joint Venture, the Yima Joint Ventures and the TSEC Joint Venture) to cover our general and administrative expenses and other operating
costs. We will also limit the development of any further projects until we have assurances that acceptable financing is available
to complete the project. We may pursue the development of selective projects with strong and credible partners or off-takers where
we believe equity and debt can be raised or where we believe we can attract a financial partner to participate in the project and
where the project would utilize our technology, equipment and services.

We are also actively
seeking a partner for our technology vertical with existing businesses and vested interest in the growth of the global energy and
chemicals projects who also has financial strength, a strong global sales force and demonstrated experience in process or power
industry engineering and technology deployment are target candidates for this cooperation with us.

We currently plan to
use our available cash for (i) securing a partner for our technology business vertical; (ii) securing orders and other associated
tasks associated with our distributed power initiatives such as in China with Dengfeng Power and in Pakistan with General Electric;
(iii) executing our strategy to develop market based business verticals, (iv) general and administrative expenses (v) repaying
the ZZ Short-term Loan and the ZZ Working Capital Loan and (vi) working capital and other general corporate purposes. Although
we intend for the ZZ Joint Venture to sustain itself through its own earnings, we may also need to make additional contributions
to the ZZ Joint Venture in order for it to meet its obligations until the ZZ Joint Venture generates sufficient cash flows to cover
its operating costs and debt service. The actual allocation and timing of these expenditures will be dependent on various factors,
including changes in our strategic relationships, commodity prices and industry conditions, and other factors that we cannot currently
predict. In particular, any future decrease in economic activity in China or in other regions of the world in which we may in the
future do business could significantly and adversely affect our results of operations and financial condition. Operating cash flows
from our joint venture operating projects can be positively or negatively impacted by changes in coal and methanol prices. These
are commodities where market pricing is often volatile in nature.

We do not currently
have all of the financial and human resources necessary to fully develop and execute on all of our business opportunities; however,
we intend to finance our development through paid services, technology access fees, equity and debt financings and by securing
financial and strategic partners focused on the development of these opportunities. We can make no assurances that our business
operations will provide us with sufficient cash flows to continue our operations. We are also seeking to raise capital by partnering
our technology vertical. We may need to raise additional capital through equity and debt financing for any new ventures that are
developed, to support our existing projects and possible expansions thereof and for our corporate general and administrative expenses.
We may consider a full range of financing options in order to create the most value in the context of the increasing interest we
are seeing in our technology. We cannot provide any assurance that any financing will be available to us in the future on acceptable
terms or at all. Any such financing could be dilutive to our existing stockholders. If we cannot raise required funds on acceptable
terms, we may not be able to, among other things, (i) maintain our general and administrative expenses at current levels including
retention of key personnel and consultants; (ii) successfully develop our licensing and related service businesses; (iii) negotiate
and enter into new gasification plant development contracts and licensing agreements; (iv) make additional capital contributions
to our joint ventures; (v) fund certain obligations as they become due; and (vi) respond to competitive pressures or unanticipated
capital requirements.

Critical Accounting
Policies

The preparation of
financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires our management to make
certain estimates and assumptions which are inherently imprecise and may differ significantly from actual results achieved. We
believe the following are our critical accounting policies due to the significance, subjectivity and judgment involved in determining
our estimates used in preparing our consolidated financial statements. We evaluate our estimates and assumptions used in preparing
our consolidated financial statements on an ongoing basis utilizing historic experience, anticipated future events or trends and
on various other assumptions that are believed to be reasonable under the circumstances. The resulting effects of changes in our
estimates are recorded in our consolidated financial statements in the period in which the facts and circumstances that give rise
to the change in estimate become known.

36

We believe the following
describes significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition

Revenue from sales
of products, which has included the capacity fee and energy fee earned at the ZZ Joint Venture plant and is expected to include
sale of methanol under the ZZ Cooperation Agreement, and sales of equipment are recognized when the following elements are satisfied:
(i) there are no uncertainties regarding customer acceptance; (ii) there is persuasive evidence that an agreement exists; (iii)
delivery has occurred; (iv) the sales price is fixed or determinable; and (v) collectability is reasonably assured.

Technology licensing
revenue is typically received over the course of a project’s development as milestones are met. We may receive upfront licensing
fee payments when a license agreement is entered into. Typically, the majority of a license fee is due once project financing
and equipment installation occur. We recognize license fees as revenue when the license fees become due and payable under the license
agreement, subject to the deferral of the amount of the performance guarantee. Fees earned for engineering services, such
as services that relate to integrating our technology to a customer’s project, are recognized using the percentage-of-completion
method.

Impairment Evaluation
of Long-Lived Assets

We evaluate our long-lived
assets, such as property, plant and equipment, construction-in-progress, equity method investments and specifically identified
intangibles, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. When
we believe an impairment condition may have occurred, we are required to estimate the undiscounted future cash flows associated
with a long-lived asset or group of long-lived assets at the lowest level for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities for long-lived assets that are expected to be held and used. We evaluate our
operating plants as a whole. Production equipment at each plant is not evaluated for impairment separately, as it is integral to
the assumed future operations of the plant. All construction and development projects are reviewed for impairment whenever there
is an indication of potential reduction in fair value. If it is determined that it is no longer probable that the projects will
be completed and all capitalized costs recovered through future operations, the carrying values of the projects would be written
down to the recoverable value. If we determine that the undiscounted cash flows from an asset to be held and used are less than
the carrying amount of the asset, or if we have classified an asset as held for sale, we estimate fair value to determine the amount
of any impairment charge.

The following summarizes
some of the most significant estimates and assumptions used in evaluating if we have an impairment charge.

Undiscounted
Expected Future Cash Flows
.
In order to estimate future cash flows, we consider historical cash flows and changes in the
market environment and other factors that may affect future cash flows. To the extent applicable, the assumptions we use are consistent
with forecasts that we are otherwise required to make (for example, in preparing our other earnings forecasts). The use of this
method involves inherent uncertainty. We use our best estimates in making these evaluations and consider various factors, including
forward price curves for energy, feedstock costs, and other operating costs. However, actual future market prices and project costs
could vary from the assumptions used in our estimates, and the impact of such variations could be material.

Fair Value
.
Generally, fair value will be determined using valuation techniques such as the present value of expected future cash flows.
We will also discount the estimated future cash flows associated with the asset using a single interest rate representative of
the risk involved with such an investment. We may also consider prices of similar assets, consult with brokers, or employ other
valuation techniques. We use our best estimates in making these evaluations; however, actual future market prices and project costs
could vary from the assumptions used in our estimates, and the impact of such variations could be material.

The evaluation and
measurement of impairments for investments such as our investment in the Yima Joint Ventures involve the same uncertainties as
described for long-lived assets that we own directly. Similarly, our estimates that we make with respect to our equity and cost-method
investments are subjective, and the impact of variations in these estimates could be material.

ZZ Joint Venture
Plant Impairment Analysis

During the three months
ended December 31, 2014, there was a significant decline in methanol prices in the China commodity market, which put significant
pressure on our ZZ Joint Venture facility methanol production margins. Accordingly, we evaluated the ongoing value of the ZZ Joint
Venture facility. Based on this evaluation, we determined that the $32 million carrying value of the ZZ Joint Venture facility
was no longer entirely recoverable. Due to this impairment, the Company wrote down the value of the facility to its estimated fair
value of $11 million. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820. Changes in market
conditions for methanol in China, as well as changes in assumptions used to test for recoverability and to determine fair value,
could result in additional impairment charges in the future for our ZZ Joint Venture facility.

The joint ventures
which we enter into may be considered variable interest entities, or VIEs. We consolidate all VIEs where we are the primary beneficiary.
This determination is made at the inception of our involvement with the VIE. We consider both qualitative and quantitative factors
and form a conclusion that we, or another interest holder, absorb a majority of the entity’s risk for expected losses, receive
a majority of the entity’s potential for expected residual returns, or both. We do not consolidate VIEs where we are not
the primary beneficiary. We account for these unconsolidated VIEs under the equity method or cost method of accounting and include
our net investment in investments on our consolidated balance sheets. Our equity interest in the net income or loss from our unconsolidated
VIEs under the equity method of accounting is recorded in non-operating (income) expense on a net basis on our consolidated statement
of operations.

We have determined
that the ZZ Joint Venture is a VIE and that we are the primary beneficiary. We have determined that the Yima Joint Ventures are
VIEs and that Yima is the primary beneficiary since Yima has a 75% ownership interest in the Yima Joint Ventures. We have determined
that TSEC is a VIE and that TST is the primary beneficiary since TST has a 65% ownership interest in the Joint Venture. We have
determined that the GC Joint Venture is a VIE and that we are the primary beneficiary since we have a 51% ownership interest in
the GC Joint Venture and since there are no qualitative factors that would preclude us from being deemed the primary beneficiary.
We have determined that SRS is a VIE and that we are not the primary beneficiary since we and Midas each have a 50% ownership interest
in SRS and the control, risks and benefits of SRS are shared equally, SRS was dissolved on January 9, 2015.

38

Item 3. Quantitative
and Qualitative Disclosures About Market Risk.

Qualitative disclosure
about market risk

We are exposed to
certain qualitative market risks as part of our ongoing business operations, including risks from changes in foreign currency exchange
rates and commodity prices that could impact our financial position, results of operations and cash flows. We manage our exposure
to these risks through regular operating and financing activities, and may, in the future, use derivative financial instruments
to manage this risk. We have not entered into any derivative financial instruments to date.

Foreign currency
risk

We conduct operations
in China and our functional currency in China is the Renminbi Yuan. Our consolidated financial statements are expressed in U.S.
dollars and will be negatively affected if foreign currencies, such as the Renminbi Yuan, depreciate relative to the U.S. dollar.
In addition, our currency exchange losses may be magnified by exchange control regulations in China or other countries that restrict
our ability to convert into U.S. dollars. The People’s Bank of China, the monetary authority in China, sets the spot rate
of the Renminbi Yuan, and may also use a variety of techniques, such as intervention by its central bank or imposition of regulatory
controls or taxes, to affect the exchange rate relative to the U.S. dollar. In the future, the Chinese government may also issue
a new currency to replace its existing currency or alter the exchange rate or relative exchange characteristics by devaluation
or revaluation of the Renminbi Yuan in ways that may be adverse to our interests.

Commodity price
risk

Our business plan
is to purchase coal and other consumables from suppliers and to sell commodities, such as syngas, methanol and other products.
Coal is the largest component of our costs of product sales and in order to mitigate coal price fluctuation risk for future projects,
we expect to enter into long-term contracts for coal supply or to acquire coal assets.

The majority of our
revenues are derived from the sale of methanol in China. We do not have long term offtake agreements for these sales, so revenues
fluctuate based on local market spot prices, which have been under significant pressure, and we are unsure of how much longer this
will continue. Our liquidity and capital resources will be materially adversely affected if markets remain under pressure, and
we are unable to obtain satisfactory prices for these commodities or if prospective buyers do not purchase these commodities.

Hedging transactions
may be available to reduce our exposure to these commodity price risks, but availability may be limited and we may not be able
to successfully hedge this exposure at all. To date, we have not entered into any hedging transactions.

Customer credit
risk

When our projects,
including the ZZ Joint Venture plant’s methanol production, progress to commercial operation, we will be exposed to the
risk of financial non-performance by customers. To manage customer credit risk, we intend to monitor credit ratings of customers
and seek to minimize exposure to any one customer where other customers are readily available.

39

Item 4. Controls
and Procedures.

Evaluation of Disclosure
Controls and Procedures

We maintain disclosure
controls and procedures designed to ensure that information required to be disclosed in our annual and periodic reports is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and
forms. In addition, we designed these disclosure controls and procedures to ensure that this information is accumulated and communicated
to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required
disclosures.

Our management, with
the participation of the Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended, or
the Exchange Act, as of December 31, 2014. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were effective as of December 31, 2014.

Notwithstanding the
foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures
of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth
in the Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.

Changes in Internal Control Over Financial Reporting

There have been no
changes in our internal control over financial reporting during the three months and six months ended December 31, 2014 that have
materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

None.

Item 1A. Risk Factors.

We will require
substantial additional funding, and our failure to raise additional capital necessary to support and expand our operations could
reduce our ability to compete and could harm our business.

As of December 31,
2014, we had $13.7 million in cash and cash equivalents. We currently plan to use our available cash for (i) securing a partner
for our technology business vertical; (ii) securing orders and other associated tasks associated with our distributed power initiatives
such as in China with Dengfeng Power and in Pakistan with General Electric; (iii) executing our strategy to develop market based
business verticals, (iv) general and administrative expenses; (v) repaying the ZZ Short-term Loan and the ZZ Working Capital Loan
and (vi) working capital and other general corporate purposes. Although we intend for the ZZ Joint Venture to sustain itself through
its own earnings, we may also need to make additional contributions to the ZZ Joint Venture in order for it to meet its obligations
until the ZZ Joint Venture generates sufficient cash flows to cover its operating costs and debt service. The actual allocation
and timing of these expenditures will be dependent on various factors, including changes in our strategic relationships, commodity
prices and industry conditions, and other factors that we cannot currently predict. In particular, any future decrease in economic
activity in China or in other regions of the world in which we may in the future do business could significantly and adversely
affect our results of operations and financial condition. Operating cash flows from our joint venture operating projects can be
positively or negatively impacted by changes in coal and methanol prices. These are commodities where market pricing is often volatile
in nature.

We have made significant
progress recently on partnering our China business through the TSEC Joint Venture, including through the recently announced projects
with ICCDI, and Aluminum Corporation of China for an industrial syngas project, as well as with Dengfeng for a planned 160 MW distributed
power generation program initially in Henan Province, China. However, we expect to continue to have negative operating cash flows
until we can generate sufficient cash flows from our technology, equipment and services business and SES China (including the ZZ
Joint Venture, the Yima Joint Ventures and the TSEC Joint Venture) to cover our general and administrative expenses and other operating
costs. We will also limit the development of any further projects until we have assurances that acceptable financing is available
to complete the project. We may pursue the development of selective projects with strong and credible partners or off-takers where
we believe equity and debt can be raised or where we believe we can attract a financial partner to participate in the project and
where the project would utilize our technology, equipment and services.

40

We do not currently
have all of the financial resources to fully develop and execute on all of our other business opportunities; however, we intend
to finance our development through paid services, technology access fees, equity financings and by securing financial and strategic
partners focused on development of these opportunities. We can make no assurances that our business operations will provide us
with sufficient cash flows to continue our operations. We will need to raise additional capital through equity and debt financing
for any new ventures that are developed, to support our existing projects and possible expansions thereof and for our corporate
general and administrative expenses. We may consider a full range of financing options in order to create the most value in the
context of the increasing interest we are witnessing in our proprietary technology.

We cannot provide
any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such financing could
be dilutive to our existing stockholders. If we cannot raise required funds on acceptable terms, we may not be able to, among other
things, (i) maintain our general and administrative expenses at current levels including retention of key personnel and consultants;
(ii) successfully develop our licensing and related service businesses; (iii) negotiate and enter into new gasification
plant development contracts and licensing agreements; (iv) make additional capital contributions to our joint ventures; (v)
fund certain obligations as they become due; and (vi) respond to competitive pressures or unanticipated capital requirements.

The majority of our current revenues are
derived from the sale of methanol in China. We do not have long term offtake agreements for these sales, so revenues fluctuate
based on local market spot prices, which have been under significant pressure, and we are unsure of how much longer this will continue.
During the quarter ended December 31, 2014, we incurred an impairment loss associated with the impact of reduced methanol prices
on our ZZ Joint Venture plant. While changes in market conditions for methanol in China may increase our operating margins, any
further degradation in methanol prices, as well as changes in assumptions used to test for recoverability and to determine fair
value, could result in additional impairment charges in the future for the ZZ Joint Venture facility or an impairment related to
the Yima investment. Our liquidity is also negatively effected if the ZZ Joint Venture plant does not operate due to the reduced
methanol pricing. Although we are considering various options for these gasifiers due to the pricing of methanol, including repurposing
by moving them to a new location, there can be no assurances that we will be able to generate more than limited revenues until
methanol prices recover. Our revenues, liquidity and capital resources will be materially adversely affected if markets remain
under pressure, and we are unable to obtain satisfactory prices for these commodities or if prospective buyers do not purchase
these commodities.

We may be subject
to future impairment losses due to potential declines in the fair value of our assets
.

During the three months
ended December 31, 2014, there was a significant decline in methanol prices in the China commodity market, which put significant
pressure on our ZZ Joint Venture plant methanol production margins. As a result, we evaluated both operating assets for potential
impairment as of December 31, 2014. Based on this evaluation, we determined that the $32 million carrying value of the ZZ Joint
Venture facility was no longer entirely recoverable. Due to this impairment, we wrote down the value of the facility to its estimated
fair value of $11 millon and incurred an impairment expenses of $20.9 million. The potential for future impairment at the ZZ Joint
Venture plant or for other of our assets is increased during a period of economic uncertainty, including with respect to the current
reduced pricing of methanol. Should general economic, market or business conditions decline further, and continue to have a negative
impact on our stock price or revenues, we may be required to record additional impairment charges in the future, which could materially
and adversely affect financial condition and results of operation.

Joint
ventures that we enter into present a number of challenges that could have a material adverse effect on our business and results
of operations and cash flows.

We have developed
two projects in China, the ZZ Joint Venture and the Yima Joint Ventures, and have recently entered into our TSEC Joint Venture.
In addition, as part of our business strategy, we plan to enter into other joint ventures or similar transactions, including as
part of our business verticals for power, steel and renewables, some of which may be material. These transactions typically involve
a number of risks and present financial, managerial and operational challenges, including the existence of unknown potential disputes,
liabilities or contingencies that arise after entering into the joint venture related to the counterparties to such joint ventures,
with whom we share control. We could experience financial or other setbacks if transactions encounter unanticipated problems due
to challenges, including problems related to execution or integration. Any of these risks could reduce our revenues or increase
our expenses, which could adversely affect our results of operations and cash flows.

41

Additionally, we are
a minority owner in the Yima Joint Ventures, and we are relying on Yima to provide the management and operational support for the
project. As a result, the success and timing of the Yima project will depend upon a number of factors that will be largely outside
of our control and influence. As of June 1, 2013, we changed from the equity method of accounting for our investment in the Yima
Joint Ventures to the cost method of accounting because we concluded that we are unable to exercise significant influence over
the Yima Joint Ventures. Our conclusion regarding our lack of significant influence is based on our interactions with the
Yima Joint Ventures related to the start-up and operations and due to various other circumstances including limited participation
in operating and financial policymaking processes and our limited ability to influence technological decisions. Dependence
on Yima, and other owners of future projects in which we have a minority interest, or extended negotiations regarding the scope
of the projects, could delay or prevent the realization of targeted returns on our capital invested in these projects.

We also include the
condensed financial information of the TSEC in our consolidated financial statements. We rely on personnel in China to compile
this information and deliver it to us in a timely fashion so that the information can be incorporated into our consolidated financial
statements prior to the due dates for our annual and quarterly reports. Any difficulties or delays in receiving this information
or incorporating it into our consolidated financial statements could impair our ability to timely file our annual and quarterly
reports.

We are dependent
on our relationships with our strategic partners for project development.

We are dependent on
our relationships with our strategic partners to accelerate our expansion, fund our development efforts, better understand market
practices and regulatory issues and more effectively handle challenges that may arise. Through the TSEC Joint Venture, we have
partnered a significant portion of our China business with TST, a financially strong and highly skilled Chinese company which desires
to invest into the growth of China’s clean energy space and which recognizes the opportunity afforded by our technology capability
and business model. We believe partnering with TST can accelerate the commercialization of our technology on a global basis
and will enable us to reduce our capital requirements to achieve this acceleration. We are also seeking a partner for our technology
vertical. Our future success will depend on these relationships and any other strategic relationships that we may enter into. We
cannot assure you that we will satisfy the conditions required to maintain these relationships under existing agreements or that
we can prevent the termination of these agreements. We also cannot assure you that we will be able to enter into relationships
with future strategic partners on acceptable terms, including partnering our technology vertical. The termination of any relationship
with an existing strategic partner, our failure to successfully partner our technology vertical, or the inability to establish
additional strategic relationships may limit our ability to develop the TSEC Joint Venture, our projects, including the ZZ Joint
Venture and Yima Joint Ventures and our marketing arrangement with GE and Midrex, and may have a material adverse effect on our
business and financial condition.

We may not be
successful developing our business strategies.

In addition to the
completion of the Yima Joint Venture plant and the restart of the ZZ Joint Venture plant, we intend to focus on developing our
business verticals and focus on the development of our recently formed TSEC Joint Venture. Although we have begun to
develop our power vertical through our relationship with GE and our DRI steel vertical with Midrex, we are still in the early stages
of developing these verticals and many of the relationships with potential partners are still being cultivated. We are also seeking
a partner for our technology vertical. We cannot provide assurance that we will be able to successfully develop our business verticals
or to successfully grow the TSEC Joint Venture, which depends upon several factors, including the strength of global energy and
chemical markets, commodity prices and the continued success of our ZZ Joint Venture Plant and Yima Joint Venture plant. There
can be no assurances that we will be able to succeed in these strategies and our inability to do so could have a material adverse
effect on our business and results of operation.

Our results
of operations and cash flows may fluctuate.

Our operating results
and cash flows may fluctuate significantly as a result of a variety of factors, many of which are outside our control. Factors
that may affect our operating results and cash flows include: (i) the success of the TSEC Joint Venture, the Yima Joint Ventures
and our ZZ Joint Venture; (ii) our ability to obtain new customers and retain existing customers; (iii) the cost of coal and
electricity; (iv) the success and acceptance of our technology; (v) our ability to successfully develop our licensing
business verticals for power, steel and renewables, as well as execute on our projects; (vi) the ability to obtain financing
for our projects; (vii) shortages of equipment, raw materials or feedstock; (viii) approvals by various government agencies;
(ix) the volatility of local Chinese methanol markets; and (x) general economic conditions as well as economic conditions
specific to the energy industry.

42

Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults
Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other
Information.

None.

Forward-Looking Statements

This Quarterly Report
on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Exchange Act. All statements other than statements of historical fact are forward-looking
statements. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to
differ materially from those projected. Among those risks, trends and uncertainties are the ability of our ZZ joint venture to
effectively operate XE's methanol plant and produce methanol; the ability of our project with Yima to produce earnings and pay
dividends; our ability to develop and expand business of the TSEC joint venture in the joint venture territory; our ability to
successfully partner our technology business; our ability to develop our power business unit and marketing arrangement with GE
and our other business verticals, including DRI steel, through our marketing arrangement with Midrex Technologies, and renewables;
our ability to successfully develop the SES licensing business; events or circumstances which result in an impairment of assets,
including, but not lmited to, at our ZZ Joint Venture; our ability to reduce operating costs; our ability to make distributions
and repatriate earnings from our Chinese operations; our limited history, and viability of our technology; commodity prices, including
in particular methanol, and the availability and terms of financing; our ability to obtain the necessary approvals and permits
for future projects; our ability to raise additional capital, if any, and our ability to estimate the sufficiency of existing capital
resources; the sufficiency of internal controls and procedures; and our results of operations in countries outside of the U.S.,
where we are continuing to pursue and develop projects. Although we believe that in making such forward-looking statements our
expectations are based upon reasonable assumptions, such statements may be influenced by factors that could cause actual outcomes
and results to be materially different from those projected. We cannot assure you that the assumptions upon which these statements
are based will prove to have been correct.

When used in this
Form 10-Q, the words “expect,” “anticipate,” “intend,” “plan,” “believe,”
“seek,” “estimate” and similar expressions are intended to identify forward-looking statements, although
not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and
uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a
number of important reasons, including those discussed under “Risk Factors” in our Annual Report on Form 10-K for the
year ended June 30, 2014, as well as in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and elsewhere in this Form 10-Q.

43

You should read these
statements carefully because they discuss our expectations about our future performance, contain projections of our future operating
results or our future financial condition, or state other “forward-looking” information. You should be aware that the
occurrence of certain of the events described in this Form 10-Q could substantially harm our business, results of operations and
financial condition and that upon the occurrence of any of these events, the trading price of our common stock could decline, and
you could lose all or part of your investment.

We cannot guarantee
any future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this Form 10-Q after the date hereof.

Certification of Chief Executive Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

32.2*

Certification of Chief Financial Officer of Synthesis Energy Systems, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

101.INS*

XBRL Instance Document.

101.SCH*

XBRL Taxonomy Extension Schema Document.

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed
herewith.

45

SIGNATURES

Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

SYNTHESIS ENERGY SYSTEMS, INC.

Date: February 13, 2015

By:

/s/ Robert Rigdon

Robert Rigdon

President and Chief Executive Officer

Date: February 13, 2015

By:

/s/ Roger Ondreko

Roger Ondreko

Chief Financial Officer

46

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE
OFFICER PURSUANT TO RULE
13a-14(a)/15d-14(a) PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED

I, Robert Rigdon, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Synthesis Energy Systems, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.

Date: February 13, 2015

/s/ Robert Rigdon

Robert Rigdon

President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER PURSUANT TO RULE 13a-14(a)
PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Roger Ondreko, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Synthesis Energy Systems, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.

Date: February 13, 2015

/s/Roger Ondreko

Roger Ondreko

Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE
OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with
the Quarterly Report of Synthesis Energy Systems, Inc. (the “Company”) on Form 10-Q for the period ended December 31,
2014 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Robert Rigdon, President
and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:

1.

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and

2.

The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.

/s/
Robert Rigdon

Robert Rigdon

President and Chief Executive Officer

February 13, 2015

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with
the Quarterly Report of Synthesis Energy Systems, Inc. (the “Company”) on Form 10-Q for the period ended December 31,
2014 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Roger Ondreko, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge:

1.

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and

2.

The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.